15098 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations

Docket Number 97–NM–22–AD.’’ The

postcard will be date stamped and

returned to the commenter.

Regulatory Impact

The regulations adopted herein will

not have substantial direct effects on the

States, on the relationship between the

national government and the States, or

on the distribution of power and

responsibilities among the various

levels of government. Therefore, in

accordance with Executive Order 12612,

it is determined that this final rule does

not have sufficient federalism

implications to warrant the preparation

of a Federalism Assessment.

For the reasons discussed above, I

certify that this action (1) is not a

‘‘significant regulatory action’’ under

Executive Order 12866; (2) is not a

‘‘significant rule’’ under DOT

Regulatory Policies and Procedures (44

FR 11034, February 26, 1979); and (3)

will not have a significant economic

impact, positive or negative, on a

substantial number of small entities

under the criteria of the Regulatory

Flexibility Act. A final evaluation has

been prepared for this action and it is

contained in the Rules Docket. A copy

of it may be obtained from the Rules

Docket at the location provided under

the caption ADDRESSES.

List of Subjects in 14 CFR Part 39

Air transportation, Aircraft, Aviation

safety, Incorporation by reference,

Safety.

Adoption of the Amendment

Accordingly, pursuant to the

authority delegated to me by the

Administrator, the Federal Aviation

Administration amends part 39 of the

Federal Aviation Regulations (14 CFR

part 39) as follows:

PART 39—AIRWORTHINESS

DIRECTIVES

1. The authority citation for part 39

continues to read as follows:

Authority: 49 U.S.C. 106(g), 40113, 44701.

§ 39.13 [Amended]

2. Section 39.13 is amended by

adding the following new airworthiness

directive:

97–07–01 Airbus: Amendment 39–9974.

Docket 97–NM–22–AD.

Applicability: Model A330–301 series

airplanes having manufacturer’s serial

number (MSN) 1 through 106, inclusive; and

Model A340–211, –212, –311, and –312

series airplanes having MSN 1 through 113,

inclusive; on which Airbus Modification No.

40063S10052 (ground cooling system) has

been installed; certificated in any category.

Note 1: This AD applies to each airplane

identified in the preceding applicability

provision, regardless of whether it has been

otherwise modified, altered, or repaired in

the area subject to the requirements of this

AD. For airplanes that have been modified,

altered, or repaired so that the performance

of the requirements of this AD is affected, the

owner/operator must request approval for an

alternative method of compliance in

accordance with paragraph (c) of this AD.

The request should include an assessment of

the effect of the modification, alteration, or

repair on the unsafe condition addressed by

this AD; and, if the unsafe condition has not

been eliminated, the request should include

specific proposed actions to address it.

Compliance: Required as indicated, unless

accomplished previously.

To prevent water from accumulating in the

Air Data/Inertial Reference Unit (ADIRU)

trays of the avionics racks, which could

result in the damage to or failure of the

ADIRU(s) and consequent loss of air data and

navigational information to the flightcrew,

accomplish the following:

(a) Within 500 hours time-in-service after

the effective date of this AD, deactivate the

avionics ground refrigeration unit (GRU) in

accordance with Airbus All Operators Telex

21–01, dated March 28, 1995.

(b) Modification of the avionics equipment

ventilation system in accordance with Airbus

Service Bulletin A330–21–3028, Revision 2,

dated May 5, 1995 (for Model A330 series

airplanes); or Airbus Service Bulletin A340–

21–4046, Revision 2, dated May 5, 1995 (for

Model A340 series airplanes); as applicable;

constitutes terminating action for the

requirements of paragraph (a) of this AD.

Once the modification is completed, the

avionics GRU may be reactivated.

(c) An alternative method of compliance or

adjustment of the compliance time that

provides an acceptable level of safety may be

used if approved by the Manager,

Standardization Branch, ANM–113.

Operators shall submit their requests through

an appropriate FAA Principal Maintenance

Inspector, who may add comments and then

send it to the Manager, Standardization

Branch, ANM–113.

Note 2: Information concerning the

existence of approved alternative methods of

compliance with this AD, if any, may be

obtained from the Standardization Branch,

ANM–113.

(d) Special flight permits may be issued in

accordance with sections 21.197 and 21.199

of the Federal Aviation Regulations (14 CFR

21.197 and 21.199) to operate the airplane to

a location where the requirements of this AD

can be accomplished.

(e) The modification, if accomplished,

shall be done in accordance with the

following Airbus service bulletins, which

contain the specified list of effective pages:

Service bulletin revision and date Page No. Revision level shown on

page Date shown on page

A330–21–3028, Revision 2, May 5, 1995 ....................................... 1, 3–6 2 ..................................... May 5, 1995.

2, 11, 23, 24, 29–30 1 ..................................... March 3, 1995.

7–10, 12–22, 25–28 Original .......................... January 19, 1995.

A340–21–4046, Revision 2, May 5, 1995 ....................................... 1–4, 2 ..................................... May 5, 1995.

5–12, 14–24, 27–30 Original .......................... January 19, 1995.

13, 25, 26, 31, 32 1 ..................................... March 3, 1995.

This incorporation by reference was

approved by the Director of the Federal

Register in accordance with 5 U.S.C. 552(a)

and 1 CFR part 51. Copies may be obtained

from Airbus Industrie, 1 Rond Point Maurice

Bellonte, 31707 Blagnac Cedex, France.

Copies may be inspected at the FAA,

Transport Airplane Directorate, 1601 Lind

Avenue, SW., Renton, Washington; or at the

Office of the Federal Register, 800 North

Capitol Street, NW., suite 700, Washington,

DC.

(f) This amendment becomes effective on

April 15, 1997.

Issued in Renton, Washington, on March

19, 1997.

Darrell M. Pederson,

Acting Manager, Transport Airplane

Directorate, Aircraft Certification Service.

[FR Doc. 97–7519 Filed 3–28–97; 8:45 am]

BILLING CODE 4910–13–U

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Parts 270 and 274

[Release No. IC–22579; IA–1623; S7–24–95]

RIN 3235–AG07

Status of Investment Advisory

Programs Under the Investment

Company Act of 1940

AGENCY: Securities and Exchange

Commission.
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations 15099

1 15 U.S.C. 77a, et seq.

2The sponsor often is a money management firm,

a broker-dealer, a mutual fund adviser or, in some

instances, a bank. See, e.g., Wall Street Preferred

Money Managers, Inc. (pub. avail. Apr. 10, 1992)

(broker-dealer); United Missouri Bank of Kansas

City, n.a. (pub. avail. May 11, 1990, as modified Jan.

23, 1995) (bank); Strategic Advisers Inc. (pub. avail.

Dec. 13, 1988) (mutual fund adviser). The sponsor

or one of its affiliates also may execute some or all

of the transactions for client accounts.

3More than one portfolio manager may manage

the client’s assets, depending on the program, the

client’s investment objectives, and the size of the

client’s account. See, e.g., Rauscher Pierce Refsnes,

Inc. (pub. avail. Apr. 10, 1992); Wall Street

Preferred Money Managers, Inc., supra note 2;

Westfield Consultants Group (pub. avail. Dec. 13,

1991).

4Some investment advisory programs, however,

are marketed by the sponsor through unaffiliated

investment advisers, such as financial planners. In

some of these programs, the unaffiliated investment

adviser, rather than the sponsor, may serve as the

primary contact for its clients that participate in the

program. See, e.g., Westfield Consultants Group,

supra note 3.

ACTION: Final rule.

SUMMARY: The Commission is adopting

rule 3a–4 under the Investment

Company Act of 1940 to provide a

nonexclusive safe harbor from the

definition of investment company for

certain programs under which

investment advisory services are

provided on a discretionary basis to a

large number of advisory clients having

relatively small amounts to invest. An

investment advisory program that is

organized and operated in accordance

with the rule’s provisions is not

required to register as an investment

company under the Investment

Company Act of 1940, or to comply

with the Act’s requirements. In

addition, such a program is not subject

to the registration requirement under

section 5 of the Securities Act of 1933.

EFFECTIVE DATE: March 31, 1997.

FOR FURTHER INFORMATION CONTACT:

Rochelle Kauffman Plesset, Senior

Counsel, (202) 942–0660, Office of Chief

Counsel, Division of Investment

Management, 450 Fifth Street, N.W.,

Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The

Securities and Exchange Commission

(‘‘Commission’’) is adopting rule 3a–4

under the Investment Company Act of

1940 [15 U.S.C. 80a–1, et seq.]

(‘‘Investment Company Act’’). Rule

3a–4 provides a nonexclusive safe

harbor from the definition of investment

company for certain programs under

which investment advisory services are

provided to advisory clients

(‘‘investment advisory programs’’).

Table of Contents

Executive Summary

I. Background

II. Discussion

A. Preliminary Matters

B. Definitions

1. The Sponsor

2. Investment Advisory Program

C. Provisions Designed to Ensure that Each

Client Receives Individualized

Treatment

1. Individualized Management of Client

Accounts

2. Initial and Ongoing Client Contact

3. Reasonable Management Restrictions

4. Quarterly Account Statements

5. Minimum Account Size

D. Client Retention of Ownership of

Securities

1. Ability to Withdraw and Pledge

Securities

2. Right to Vote Securities and Receive

Certain Documents as Securityholders

3. Right to Receive Trade Confirmations

4. Legal Rights as Securityholders

E. Policies and Procedures and Form N–

3a4

F. Investment Advisers Act Issues Raised

by Investment Advisory Programs

III. Cost/Benefit Analysis

IV. Paperwork Reduction Act

V. Final Regulatory Flexibility Analysis

VI. Effective Date

VII. Statutory Authority

Text of Rule

Executive Summary

The Commission is adopting rule

3a–4 under the Investment Company

Act to provide a nonexclusive safe

harbor from the definition of investment

company for certain investment

advisory programs. These programs

typically are designed by investment

advisers or other money managers

seeking to provide the same or similar

professional portfolio management

services on a discretionary basis to a

large number of advisory clients having

relatively small amounts to invest.

Under rule 3a–4, any investment

advisory program organized and

operated in accordance with the rule’s

provisions is deemed not to be an

investment company within the

meaning of the Investment Company

Act. In addition, a preliminary note to

rule 3a–4 states that there is no

registration requirement under section 5

of the Securities Act of 1933

(‘‘Securities Act’’) 1 with respect to

investment advisory programs that are

organized and operated in compliance

with the provisions of the rule.

The rule provides that: (i) each

client’s account must be managed on the

basis of the client’s financial situation

and investment objectives, and in

accordance with any reasonable

restrictions imposed by the client on the

management of the account; (ii) the

sponsor of the program must obtain

sufficient information from each client

to be able to provide individualized

investment advice to the client; (iii) the

sponsor and portfolio manager must be

reasonably available to consult with

each client; (iv) each client must have

the ability to impose reasonable

restrictions on the management of the

client’s account; (v) each client must be

provided with a quarterly account

statement containing a description of all

activity in the client’s account; and (vi)

each client must retain certain indicia of

ownership of all securities and funds in

the account. The rule is intended to be

a nonexclusive safe harbor; a program

that is not organized and operated in a

manner consistent with the rule does

not necessarily meet the Investment

Company Act’s definition of investment

company. The rule, as adopted, does not

include provisions regarding written

policies and procedures, the

maintenance of records, or the filing of

a form with the Commission that were

proposed for comment in 1995.

I. Background

In recent years, the number of

investment advisory programs that are

designed to provide professional

portfolio management services on a

discretionary basis to a large number of

clients has increased greatly. These

programs historically have been offered

typically to clients who are investing

amounts of money less than the

minimum investments for individual

accounts otherwise required by

participating investment advisers, but

significantly more than the minimum

account sizes of most mutual funds.

These investment advisory programs

typically are organized and

administered by a sponsor, which

provides, or arranges for the provision

of, asset allocation advice and

administrative services.2 In some

programs, the sponsor or its employees

also provide portfolio management

services, including the selection of

particular securities, to the program’s

clients. In other programs, the sponsor

selects, or provides advice to clients

regarding the selection of, another

investment adviser (which may or may

not be affiliated with the sponsor) to act

as the client’s portfolio manager.3 In

these programs, the sponsor generally is

responsible for the ongoing monitoring

of the management of the account by the

manager or managers selected. The

sponsor, rather than the portfolio

manager, often serves as the primary

contact for the client in connection with

the program.4 Sponsors and portfolio

managers usually meet the definition of

‘‘investment adviser’’ under the

Investment Advisers Act of 1940
15100 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations

5 15 U.S.C. 80b–1, et seq. Section 202(a)(11) of the

Advisers Act (15 U.S.C. 80b–2(a)(11)) defines

‘‘investment adviser’’ as ‘‘any person who, for

compensation, engages in the business of advising

others, either directly or through publications or

writings, as to the value of securities or as to the

advisability of investing in, purchasing, or selling

securities, or who, for compensation and as part of

a regular business, issues or promulgates analyses

or reports concerning securities * * *.’’ A bank

generally is excepted from the definition of

investment adviser under Section 202(a)(11)(A) of

the Advisers Act. A broker-dealer that sponsors an

investment advisory program generally cannot rely

on the broker-dealer exception from the definition

of investment adviser in Section 202(a)(11)(C) of the

Advisers Act. See, e.g., Status of Investment

Advisory Programs under the Investment Company

Act, Investment Company Act Release No. 21260

(July 27, 1995), 60 FR 39574 (Aug. 2, 1995) (‘‘July

Release’’); National Regulatory Services, Inc. (pub.

avail. Dec. 2, 1992).

6The National Securities Markets Improvement

Act of 1996 (Pub. L. No. 104–290) amended the

Advisers Act to provide that certain investment

advisers will be subject primarily to the supervision

of the Commission, while other advisers will be

subject primarily to state regulation. Effective April

9, 1997, if an investment adviser is regulated or

required to be regulated as an investment adviser

in the state in which it maintains its principal office

and place of business, it may not register with the

Commission unless (1) it has assets under

management of $25 million or more, or (2) it

advises a registered investment company. Proposed

rules published for comment by the Commission

would reallocate regulatory responsibilities for

investment advisers between the Commission and

the states. Rules Implementing Amendments to the

Investment Advisers Act of 1940, Investment

Advisers Act Release No. 1601 (Dec. 18, 1996), 61

FR 68480 (Dec. 27, 1996).

7See paragraph (g)(4) of rule 204–3 under the

Advisers Act (17 CFR 275.204–3(g)(4)) (defining

wrap fee program for purposes of wrap fee brochure

requirement).

8Cerulli Associates, Inc. and Lipper Analytical

Services, Inc., The Cerulli-Lipper Analytical Report:

State of the Wrap Account Industry 5 (1996). These

figures include assets in mutual fund wrap

programs, also called mutual fund asset allocation

programs. Unlike traditional wrap fee programs,

mutual fund wrap programs contemplate that a

client’s assets are allocated only among specified

mutual funds. Assets in mutual fund wrap

programs represented 19% of total assets in wrap

fee programs at year-end 1995. Id. at 7.

9For a detailed discussion of why an investment

advisory program may meet the definition of

investment company and may be deemed to be

issuing securities, see July Release, supra note 5, at

Section I. See also In the Matter of Clarke Lanzen

Skalla Investment Firm, Inc., Investment Company

Act Release No. 21140 (June 16, 1995); SEC v. First

National City Bank, Litigation Release No. 4534

[1969–1970 Transfer Binder] Fed. Sec. L. Rep.

(CCH) ¶ 92,592 (Feb. 6, 1970).

10 Individualized Investment Management

Services, Investment Company Act Release No.

11391 (Oct. 10, 1980), 45 FR 69479 (Oct. 21, 1980)

(‘‘1980 Release’’). The 1980 Release also stated that

the Commission’s Division of Corporation Finance

had indicated that if rule 3a–4 were adopted, that

Division would not recommend that the

Commission take enforcement action if interests in

an investment advisory program operated in

accordance with the proposed rule’s requirements

were not registered under the Securities Act. Id. at

n.15.

11See July Release, supra note 5, at n.20 and

accompanying text.

12See, e.g., Benson White & Company (pub. avail.

June 14, 1995); Wall Street Preferred Money

Managers, Inc., supra note 2; Rauscher Pierce

Refsnes, Inc., supra note 3; Westfield Consultants

Group, supra note 3; WestAmerican Investment

Company (pub. avail. Nov. 26, 1991); Rushmore

Investment Advisers, Ltd. (pub. avail. Feb. 1, 1991);

Qualivest Capital Management, Inc. (pub. avail. July

30, 1990); United Missouri Bank of Kansas City,

n.a., supra note 2; Manning & Napier Advisors, Inc.

(pub. avail. Apr. 24, 1990); Jeffries & Company (pub.

avail. June 16, 1989); Strategic Advisers, Inc., supra

note 2; Scudder Fund Management Service (pub.

avail. Aug. 17, 1988); Shearson/American Express,

Inc. (pub. avail. July 13, 1983); Paley & Ganz, Inc.

(pub. avail. Dec. 6, 1982).

13 July Release, supra note 5.

14 July Release, supra note 5, at Section I.

15The Note to the revised proposed rule stated

that interests in investment advisory programs

organized and operated in compliance with the rule

would not be required to be registered under the

Securities Act. See July Release, supra note 5, at

n.26 and accompanying text; Note to revised

proposed rule 3a–4.

16The comment letters and a summary of the

comments prepared by the Commission staff are

included in File No. S7–24–95.

17See infra Section II.E.

(‘‘Advisers Act’’),5 and may be required

to register under that Act.6 Included

among investment advisory programs

developed in the recent past are those

commonly referred to as ‘‘wrap fee

programs.’’ In a wrap fee program, the

client typically is provided with

portfolio management, execution of

transactions, asset allocation, and

administrative services for a single fee

based on the size of the account.7 At

year-end 1995, assets in wrap fee

programs totaled approximately $101.6

billion, an increase of over 30 percent in

one year.8

Under wrap fee and other investment

advisory programs, a client’s account

typically is managed on a discretionary

basis in accordance with pre-selected

investment objectives. Clients with

similar investment objectives often

receive the same investment advice and

may hold the same or substantially the

same securities in their accounts. In

light of this similarity of management,

some of these investment advisory

programs may meet the definition of

investment company under the

Investment Company Act, and may be

issuing securities for purposes of the

Securities Act.9

In 1980, the Commission sought to

address certain issues presented by

investment advisory programs by

proposing rule 3a–4 under the

Investment Company Act, which would

have provided a safe harbor from the

definition of investment company for

investment advisory programs operating

in the manner described in the rule.10

Commenters generally opposed the

proposed rule, and it was never

adopted.11 After this proposal, however,

the Commission’s Division of

Investment Management (‘‘Division’’)

received numerous requests for

assurance that it would not recommend

enforcement action with respect to

investment advisory programs if they

operated without registering under the

Investment Company Act. In response to

these requests, the staff issued a series

of no-action letters describing

investment advisory programs that

would not be deemed investment

companies for purposes of the

Investment Company Act.12 Many, if not

most, of the programs described in the

no-action letters met the terms specified

in the proposed rule.

On July 27, 1995, the Commission

proposed for comment a revised version

of rule 3a–4 (‘‘revised proposed rule 3a–

4’’ or ‘‘revised proposed rule,’’ proposed

for comment in the ‘‘July Release’’).13

The objective of the revised proposed

rule was to clarify the Commission’s

views regarding the status of investment

advisory programs under the federal

securities laws by describing certain

basic attributes of an investment

advisory program that differ from those

of an investment company that is

required to register under the

Investment Company Act.14 The revised

proposed rule was based largely on the

provisions of the rule as originally

proposed, as modified and explained in

the subsequent no-action letters, but

also required the creation and

maintenance of certain documents and

records. Like the original proposal,

revised proposed rule 3a–4 would have

provided a nonexclusive safe harbor

from the definition of investment

company for investment advisory

programs that are organized and

operated in the manner described in the

rule.15

The Commission received comments

on the revised proposed rule from 28

commenters, including three law firms,

eight professional and trade

associations, and 17 financial firms (i.e.,

brokers, banks, investment advisers and

others).16 Commenters generally

expressed support for the Commission’s

goal of providing a nonexclusive safe

harbor from the definition of investment

company for certain investment

advisory programs. A number of

commenters, however, raised concerns

about particular aspects of the rule.

Many of these comments are discussed

in more detail below.17

II. Discussion

The Commission is adopting rule 3a–

4 under the Investment Company Act.

Like the proposed and revised proposed

rules, rule 3a–4 provides a nonexclusive

safe harbor from the definition of

investment company for investment

advisory programs that are organized
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations 15101

18Whether a program is nondiscretionary is

inherently a factual determination. A program

designated as ‘‘nondiscretionary’’ in which the

client follows each and every recommendation of

the adviser may raise a question whether the

program in fact is nondiscretionary.

19 In the July Release, the Commission noted that

an investment advisory program could be

considered to be an issuer because the client

accounts in the program, taken together, could be

considered to be an organized group of persons. See

July Release, supra note 5, at nn.11–15 and

accompanying text; see also Advisory Committee

on Investment Management Services for Individual

Investors: Small Account Investment Management

Services at 23 (Jan. 1973). (‘‘An investment service

which is operated on a discretionary basis and does

not afford investors individual attention would

appear to be offering an investment contract or

security, if substantially the same investment

advice is given to all clients or to discernible groups

of clients. * * *’’)

20 In letters issued by the Division of Investment

Management granting no-action assurances to

investment advisory programs, the Division of

Corporation Finance also gave assurances that it

would not recommend enforcement action to the

Commission if the requestor relied on an opinion

of counsel stating that interests in the investment

advisory program were not ‘‘securities’’ within the

meaning of the Securities Act. See, e.g., Morgan

Keegan & Company, Inc., supra note 12; Westfield

Consultants Group, supra note 3; Rauscher Pierce

Refsnes, Inc., supra note 3.

21The Note to rule 3a–4 states, in part, that there

is no registration requirement under section 5 of the

Securities Act with respect to programs that are

organized and operated in the manner described in

the rule.

22 July Release, supra note 5, at n.27.

23The staff previously has indicated that it will

no longer entertain requests for no-action relief

regarding investment advisory programs unless they

present novel or unusual issues. See, e.g., Wall

Street Preferred Money Managers, Inc., supra note

2.

24 July Release, supra note 5, at Section II.A.1.

25The sponsor of an investment advisory program

usually is an investment adviser under Section

202(a)(11) of the Advisers Act, and may be required

to register under the Act. See July Release, supra

note 5, at nn.5–8 and accompanying text and note

6 of this Release. Nonetheless, the rule is available

to any investment advisory program, regardless of

whether the sponsor is excepted from the definition

of investment adviser (e.g., a bank), or is required

to be registered under the Act.

and operated in the manner described in

the rule. The rule’s provisions have the

effect of ensuring that clients in a

program relying on the rule receive

individualized treatment, including the

opportunity to place investment

restrictions on the management of their

accounts and the right to receive

disclosure documents in connection

with securities held in their accounts.

Moreover, if an advisory program were

operated by an investment adviser

registered under the Advisers Act,

clients of the program would receive the

protections of that Act. The safe harbor

thus is designed to provide an

exemption for certain investment

advisory programs without undermining

the protection of investors who

participate in those programs.

A. Preliminary Matters

Several commenters supporting the

goals underlying rule 3a–4 asked the

Commission to clarify the scope of the

rule. Two commenters, for example,

asked the Commission to clarify that

investment advisory programs that

contemplate advisers not having

investment discretion over their clients’

assets generally do not need the safe

harbor to avoid investment company

status. The Commission notes that rule

3a–4 is intended to provide a safe

harbor for discretionary investment

advisory programs. A nondiscretionary

program (i.e., one in which the investor

has the authority to accept or reject each

recommendation to purchase or sell a

security made by the portfolio manager,

and exercises judgment with respect to

such recommendations), generally will

not meet the definition of investment

company under the Investment

Company Act or issue securities that are

required to be registered under Section

5 of the Securities Act, regardless of

whether the program is operated in

accordance with the provisions of rule

3a–4.18

One commenter asked the

Commission to clarify that a program’s

failure to operate in a manner consistent

with every provision of the rule would

not preclude the program from relying

on the safe harbor. The rule sets forth

circumstances under which an

investment advisory program will not be

considered an investment company, and

a program that is not organized and

operated in accordance with the rule’s

provisions cannot rely on the safe

harbor. The safe harbor provided by the

rule, however, is designed to be

nonexclusive. Failure to operate in the

manner described in rule 3a–4 does not

necessarily indicate that a program is an

investment company. Whether a

program that operates outside of rule

3a–4 is an investment company is a

factual determination and depends on

whether the program is an issuer of

securities under the Investment

Company Act and the Securities Act.19

Commenters suggested that, rather

than addressing the status of investment

advisory programs under the Securities

Act in a note to rule 3a–4, the rule itself

should provide that interests in the

programs do not constitute ‘‘securities’’

within the meaning of the Securities

Act.20 While the Commission has not

revised the rule in this regard, it has

revised the Note so that it does not

imply that investment advisory

programs organized and operated in

accordance with the rule may result in

the issuance of securities under the

Securities Act.21

The Commission noted in the July

Release that the adoption of rule 3a–4

would not affect the status of no-action

letters previously issued by the Division

with respect to investment advisory

programs. Therefore, investment

advisory programs operated in a manner

consistent with those letters would

continue not to be required to register

under the Investment Company Act, and

interests in the programs would not be

required to be registered as securities

under the Securities Act. The

Commission also stated in the July

Release that the Division, as a general

matter, would not consider requests for

no-action or exemptive relief with

respect to programs that do not rely on

the rule.22 In making this statement, the

Commission sought to indicate that in

the future, the staff ordinarily will not

respond to no-action requests or support

applications for exemptive relief

regarding investment advisory programs

that are similar to those programs that

have been the subject of the no-action

letters issued by the Division, but that

are not operated in accordance with all

the provisions of rule 3a–4. The staff,

however, will in the future consider

requests raising interpretive issues

under rule 3a–4, and will continue to

entertain no-action requests with

respect to programs that raise unique or

novel issues.23

B. Definitions

1. The Sponsor

A number of the terms of the revised

proposed rule provided that the

‘‘sponsor’’ of a program or another

person designated by the sponsor must

perform the duties and responsibilities

set forth in the rule. Under paragraph (b)

of revised proposed rule 3a–4,

‘‘sponsor’’ would have been defined as

any person who receives compensation

for sponsoring, organizing or

administering the program, or for

selecting, or providing advice to clients

regarding the selection of, persons

responsible for managing the client’s

account in the program. Revised

proposed rule 3a–4 would have

provided that, if a program had more

than one sponsor, one person would

need to be designated as the principal

sponsor, and that person would be

responsible for carrying out the

sponsor’s duties and responsibilities

under the rule.24 The July Release noted

that this definition and approach was

the same as that used in paragraph (f) of

rule 204–3 under the Advisers Act,

which sets forth a separate brochure

requirement for sponsors of wrap fee

programs.25
15102 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations

26Paragraph (b) of rule 3a–4, as adopted.

27 July Release, supra note 5, at Section II.A.2.

28 July Release, supra note 5, at Section II.A.2.i.

29As noted above, paragraph (a)(1) of the revised

proposed rule provided that a client’s account must

be managed on the basis of the client’s financial

situation, investment objectives and instructions

(emphasis added). The Commission has determined

that individualized treatment does not require that

the client be entitled to give instructions to the

adviser with respect to the management of the

account other than those reasonable restrictions

referenced in paragraph (a)(3). Therefore, the

Commission has clarified the rule text by replacing

the word ‘‘instructions’’ with the word

‘‘restrictions.’’ Nonetheless, the rule contemplates

that a client’s investment objective will be

formulated with appropriate input from the client

regarding the client’s financial goals and risk

tolerance.

30 July Release, supra note 5, at n.34 and

accompanying text.

31As indicated in the July Release, this position

is consistent with no-action letters issued

concerning programs that allocate client assets in

accordance with computerized investment models.

July Release, supra note 5, at n.34 and

accompanying text; see, e.g., Qualivest Capital

Management Inc., supra note 12 (sponsor proposed

to use computerized investment allocation model to

allocate client assets among money managers).

32See Suitability of Investment Advice Provided

by Investment Advisers: Custodial Account

Statements for Certain Advisory Clients, Investment

Advisers Act Release No. 1406 (Mar. 16, 1994), 59

FR 13464 (Mar. 22, 1994) at nn.2–5 and

accompanying text (‘‘Investment advisers are

fiduciaries who owe their clients a series of duties,

one of which is the duty to provide only suitable

investment advice. This duty is enforceable under

the antifraud provisions of the Advisers Act, section

206, and the Commission has sanctioned advisers

for violating this duty.’’).

Some commenters were critical of the

broad scope of the proposed definition

of sponsor, noting that a program could

have multiple sponsors under the

definition, and asserting that the

existence of multiple sponsors would

serve no purpose in assuring that clients

in a program receive individualized

management services or that the

program operates in the manner

specified in the rule. One commenter

suggested that the definition should be

modified to reach only the manager that

sponsors the program and participates

in the management of the client’s

investment portfolio (or selects another

person designated to perform such

management services). The Commission

notes that the structure of programs may

vary widely, and that the broad

definition of the term sponsor is

intended to anticipate such variations

and to provide persons involved in a

program with the flexibility to designate

the person in the best position to fulfill

the rule’s provisions. The Commission

thus has determined to adopt the

definition as proposed in order to

preserve this flexibility.26

2. Investment Advisory Program

The safe harbor described in revised

proposed rule 3a–4 would have been

available to a ‘‘program under which

investment advisory services are

provided to clients.’’ The revised

proposed rule, however, did not

specifically define the term ‘‘program.’’

Certain commenters requested that the

Commission provide further guidance as

to what constitutes a program. The

Commission notes that the use of the

term ‘‘program’’ in the rule is intended

to describe the types of advisory

services that potentially could be

subject to the Investment Company Act

and the Securities Act. The Commission

does not believe that it is necessary or

advisable to include a definition of

program in the rule, because such a

definition could result inadvertently in

the exclusion from the scope of the rule

of an entity that otherwise would be

entitled to rely on it.

C. Provisions Designed To Ensure That

Each Client Receives Individualized

Treatment

Revised proposed rule 3a–4 contained

four provisions relating to the

individualized treatment received by

clients in investment advisory programs

covered by the rule. The July Release

stated that these provisions were based

on the terms of rule 3a–4 as originally

proposed, as those provisions were

applied in the no-action letters.27 The

rule as adopted includes these four

provisions, with certain modifications

discussed below.

1. Individualized Management of Client

Accounts

Paragraph (a)(1) of the revised

proposed rule provided that a client’s

account must be managed on the basis

of the client’s financial situation,

investment objectives and instructions.

The July Release noted that this

provision was designed to delineate a

key difference between clients of

investment advisers and investors in

investment companies. A client of an

investment adviser typically is provided

with individualized advice that is based

on the client’s financial situation and

investment objectives. In contrast, the

investment adviser of an investment

company need not consider the

individual needs of the company’s

shareholders when making investment

decisions, and thus has no obligation to

ensure that each security purchased for

the company’s portfolio is an

appropriate investment for each

shareholder.28 The Commission is

adopting paragraph (a)(1) without

substantive modification.29

In the July Release, the Commission

noted that clients of an investment

advisory program with similar

investment objectives may hold

substantially the same securities in their

accounts in accordance with a portfolio

manager’s model, and that this does not

necessarily indicate that clients in the

program have not received

individualized treatment for purposes of

the rule.30 The Commission is

reaffirming this position in connection

with the adopted rule.31

The Commission also stated in the

July Release that it would not be

necessary under the rule for a portfolio

manager to make separate

determinations regarding the

appropriateness of each transaction for

each client prior to effecting the

transaction. One commenter supporting

the Commission’s position with respect

to model portfolios nonetheless urged

the Commission to require the sponsor

or program manager specifically to

evaluate the suitability of each

transaction for each client. This

commenter maintained that, without

such individualized determinations,

clients of an investment advisory

program would not receive

individualized advice.

Investment advisers under the

Advisers Act owe their clients the duty

to provide only suitable investment

advice, whether or not the advice is

provided to clients through an

investment advisory program.32 To

fulfill this suitability obligation, an

investment adviser must make a

reasonable determination that the

investment advice provided is suitable

for the client based on the client’s

financial situation and investment

objectives. The adviser’s use of a model

to manage client accounts would not

alter this obligation in any way.

2. Initial and Ongoing Client Contact

Paragraph (a)(2) of revised proposed

rule 3a–4 reflects the view that

providing individualized investment

advice contemplates an adviser having

sufficient contact with a client to elicit

the information necessary to provide the

advice. In particular, under paragraph

(a)(2), a program relying on the rule

must provide that the sponsor or a

person designated by the sponsor

(‘‘designated person’’) contact and

solicit information from the client. Such

a program also must provide for the

sponsor and the portfolio manager to be

reasonably available to consult with the

client concerning the management of

the client’s account.

Under paragraph (a)(2) of the revised

proposed rule, an advisory program

intended to qualify for the safe harbor
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations 15103

33A sponsor or designated person seeking to rely

on the rule as adopted could obtain this information

through interviews (either in person or by

telephone) and/or through questionnaires that

clients must complete and return prior to the

opening of the account. This position is consistent

with no-action letters previously issued by the staff.

See, e.g., Rauscher Pierce Refsnes, Inc., supra note

3 (prospective client will be interviewed over the

telephone); Manning & Napier Advisors, Inc., supra

note 12 (prospective client initially submits written

questionnaire and later is interviewed by

telephone).

34Paragraphs (a)(2)(i), (a)(2)(ii) and (a)(2)(iii) of

rule 3a–4, as adopted.

35 July Release, supra note 5, at Section II.A.2.ii.

36Paragraph (a)(2)(ii) of rule 3a–4, as adopted.

One commenter asked whether the rule permits a

sponsor or designated person to contact a client by

electronic mail. Under appropriate circumstances,

an electronic mail message requesting information

from clients in the program would constitute

annual client contact within the meaning of rule

3a–4. See Use of Electronic Media by BrokerDealers, Transfer Agents, and Investment Advisers

for Delivery of Information; Additional Examples

under the Securities Act of 1933, Securities

Exchange Act of 1934, and Investment Company

Act of 1940, Securities Exchange Act Release No.

37182 (May 9, 1996), 61 FR 24644 (May 15, 1996)

(interpretive release in which the Commission,

among other things, provided general guidance to

investment advisers that contemplate using

electronic media to fulfill their disclosure

obligations under the Advisers Act).

37This provision of the rule contemplates a

reasonable attempt by the sponsor or designated

person to reach and obtain information from the

client. A sponsor or designated person that is

unable to obtain information from a client after

pursuing all reasonable means to contact the client

would not be precluded from relying on the safe

harbor.

38Paragraph (a)(2)(iii) of rule 3a–4, as adopted.

This notice could be included as part of or with

another mailing sent to the client. For example, the

notification could be included as part of the

quarterly account statement described in paragraph

(a)(4) of the rule. For a discussion of the provisions

of rule 3a–4 stating that quarterly account

statements must be sent to investment advisory

clients, see infra Section II.C.4.

39For this reason, the Commission disagrees with

those commenters who asserted that the annual

contact and quarterly notification provisions are

duplicative.

40 July Release, supra note 5, at Section II.A.2.ii.

41 Id.

42This view is reflected in staff no-action letters.

See, e.g., Rauscher Pierce Refsnes, Inc., supra note

3 (the portfolio manager, when necessary, will be

available to discuss more complex questions

regarding the client’s account); Westfield

Consultants Group, supra note 3 (client will be

furnished the name and direct telephone number of

manager, who will be reasonably available during

business hours). In one no-action request, a

representation was made that the client would be

able to contact his or her financial planner or the

portfolio manager to obtain information or

assistance during normal business hours, but the

client might be charged hourly fees whenever the

client requested that certain investment officers of

the portfolio manager answer specific questions

regarding investment strategies with respect to the

client’s account. Manning & Napier Advisors, Inc.,

supra note 12. Rule 3a–4 does not preclude a

sponsor from charging reasonable fees for this or

other services. However, such fees must be

adequately disclosed to the client. See Item 7(f) of

Schedule H of Form ADV (requiring disclosure of

any fees in addition to the wrap fee that a client

in a wrap fee program may pay).

set out in the rule would have needed

to require that the sponsor or a

designated person: (1) obtain

information from the client concerning

the client’s financial situation and

investment objectives (including any

restrictions that the client may wish to

impose regarding the management of the

account) at the time the client opens the

account; 33 (2) contact the client at least

annually to determine whether there

have been any changes in the client’s

financial situation or investment

objectives, or whether the client wishes

to impose any reasonable restrictions on

the management of the account or

modify an existing restriction in a

reasonable manner; and (3) notify the

client in writing at least quarterly that

the sponsor or designated person should

be contacted if there have been any

changes in the client’s financial

situation or investment objectives, or if

the client wishes to impose or modify

any restrictions on the management of

the account. The Commission is

adopting these three provisions as

proposed, with minor modifications to

clarify their meaning.34

In the July Release, the Commission

noted that the provision regarding

annual client contact was designed to

ensure that sponsors have current

information about clients in the

program, which, in the Commission’s

view, is critical to the provision of

individually tailored advice.35 Like the

revised proposed rule, the rule as

adopted does not dictate the manner in

which a sponsor contacts its clients

annually.36 Contact can be made, for

example, in person, by telephone, or by

letter or electronic mail that includes a

questionnaire requesting the client to

provide or update relevant

information.37

The rule, as adopted, provides that

the sponsor or a designated person

seeking to rely on the rule must notify

the client in writing at least quarterly

that the sponsor or designated person

should be contacted if there have been

any changes in the client’s financial

situation or investment objectives, or if

the client wishes to impose or modify

restrictions concerning the management

of the account.38 This provision

contemplates only that notice will be

given to an investor, while the annual

contact provision described above

contemplates that the sponsor (or the

designated person) will actively attempt

to contact the client to obtain

information in order to be covered by

the rule.39

In the July Release, the Commission

noted that, if the sponsor did not

provide the portfolio manager with

information obtained from the client,

the manager might be unable to manage

the client’s account on the basis of the

client’s financial situation and

investment objectives and in accordance

with any reasonable restrictions

imposed by the client. The Commission

requested comment whether the rule

should state explicitly that the sponsor

or designated person must convey to the

portfolio manager the information

obtained from the client.40 Some

commenters stated that the rule should

contain an explicit provision to that

effect, while others suggested that such

a provision was unnecessary. It would

appear unlikely that the provision of

paragraph (a)(1) providing that the

account be managed based on the

client’s financial situation and

investment objectives and in accordance

with reasonable restrictions imposed by

the client could be satisfied if the

sponsor failed to transmit the client’s

financial information to the portfolio

manager. The Commission therefore has

determined not to include in rule 3a–4

an explicit requirement that the

information must be provided to the

portfolio manager.

Paragraph (a)(2) of the revised

proposed rule would have provided that

the sponsor and persons authorized to

make investment decisions for the

client’s account be reasonably available

to consult with the client concerning the

management of the account. In the July

Release, the Commission indicated that

this provision contemplated a client’s

having reasonable access to the sponsor

and the portfolio manager to ask

questions or to seek additional

information about the investment

advisory program or the client’s

account.41 The Commission recognizes

that a program’s sponsor may serve as

the primary contact for clients in the

program, and that direct client contact

with the portfolio manager may not

occur until after the sponsor and others

have attempted to address the client’s

questions or concerns. Nonetheless, in

the Commission’s view, a program

seeking to rely on the rule must provide

a procedure by which each client has

reasonable access to personnel of the

manager who are knowledgeable about

the management of the client’s account,

as necessary to respond to the client’s

inquiry.42 Therefore, the Commission is

adopting this provision of the revised

proposed rule with the modification

discussed below.

Several commenters suggested that

the rule should permit delegation of the

client consultation responsibilities to an

employee of the advisory firm managing

the client’s account who is
15104 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations

43Paragraph (a)(2)(iv) of rule 3a–4, as adopted.

44 July Release, supra note 5, at Section II.A.2.iii.

45Paragraph (a)(3) of rule 3a–4, as adopted.

46 July Release, supra note 5, at Section II.A.2.iii.

47 July Release, supra note 5, at Section II.A.2.iii.

The exclusion of individual stocks or stocks from

a particular country, for example, would appear to

be a reasonable restriction under ordinary facts and

circumstances. A general restriction on the

purchase of the securities of foreign issuers may be

unreasonable, however, if the manager’s investment

strategy is to invest exclusively or primarily in

foreign securities. Under those circumstances, it

may be necessary for the client and the sponsor to

reassess the choice of manager or the client’s

investment objective or strategy.

48 July Release, supra note 5, at Section II.A.2.iii.

While rule 3a–4 generally contemplates that clients

in mutual fund asset allocation programs should

have the ability to exclude specific funds from their

accounts, under some circumstances a restriction

on the purchase of a fund included in the program

may be inconsistent with the operation of the

program. This could be the case, for example, when

there is only a single fund with a specified

investment objective available in the program, and

that fund plays a necessary role in the overall

investment strategy determined to be appropriate

for the client. See Benson White & Company, supra

note 12 (program under which client assets are

allocated among four mutual funds based upon the

client’s age need not give clients the opportunity to

place restrictions on the purchase of any of the

funds).

49 In the context of a mutual fund asset allocation

program, for example, compliance with restrictions

based on the securities held by a fund in which

program assets are invested (i.e., a restriction that

would require a manager to monitor the fund’s

portfolio securities) may be so burdensome as to be

unreasonable.

50The restrictions that a client seeks to impose on

his or her account could be unreasonable when

considered in the aggregate, even though each

restriction may be reasonable when considered

separately, or if the client alters them or imposes

new restrictions with excessive frequency.

Paragraph (a)(2)(iii) of the rule, which contemplates

that a sponsor notify each client at least quarterly

to contact the sponsor if the client wishes to modify

restrictions concerning the management of the

account, is not intended to imply that it necessarily

would be reasonable for a client to change his or

her investment restrictions on a quarterly basis.

51 July Release, supra note 5, at Section II.A.2.iii.

52See Westfield Consultants Group, supra note 3

(quarterly statements will contain a review and

analysis of client account); Strategic Advisers, Inc.,

supra note 2 (quarterly statements will contain a

description of investments).

53Paragraph (a)(4) of rule 3a–4, as adopted.

54The Division has granted no-action relief to

investment advisory programs with varying

minimum account sizes. See, e.g., Qualivest Capital

Management, Inc., supra note 12 ($5 million); Wall

Street Preferred Money Managers, Inc., supra note

2 ($100,000); Strategic Advisers, Inc., supra note 2

($50,000).

knowledgeable about investment and

other matters relevant to the account.

The rule has been revised to state that

‘‘the sponsor and personnel of the

manager of the client’s account who are

knowledgeable about the account and

its management’’ must be reasonably

available to the client for consultation.43

In accordance with this provision, the

contact person need not be the

individual primarily responsible for

managing the account, but must be

sufficiently knowledgeable to discuss

and explain investment decisions that

were made.

3. Reasonable Management Restrictions

The Commission stated in the July

Release that the ability of a client in an

investment advisory program to place

reasonable restrictions on the

management of his or her account is a

critical factor in determining whether

individualized treatment is provided

under the program.44 Paragraph (a)(3) of

the revised proposed rule, therefore,

would have provided that a program

relying on the rule must include a

requirement that each client have the

ability to impose reasonable restrictions

on the management of his or her

account. Such restrictions were

described to include, for example,

prohibitions with respect to the

purchase of particular securities or

types of securities. This provision of the

rule is being adopted as reproposed,

except that language has been added to

the provision to clarify that a program

relying on rule 3a–4 need not provide

clients with the right to direct the

manager to purchase specific securities

or types of securities.45

Some of the commenters addressing

this aspect of the proposal asked the

Commission to provide additional

guidance as to what constitutes a

reasonable management restriction. As

noted in the July Release, whether a

particular restriction would be

reasonable depends on an analysis of

the relevant facts and circumstances.46

In general, a restriction would be

unreasonable if it is clearly inconsistent

with the portfolio manager’s stated

investment strategy or philosophy or the

client’s stated investment objective,47 or

is fundamentally inconsistent with the

nature or operation of the program.48

Other factors that bear on whether a

particular restriction is reasonable are

the difficulty in complying with the

restriction,49 the specificity of the

restriction and the number of other

restrictions imposed by the client.50 A

restriction would not be unreasonable,

however, simply because it placed

administrative burdens on the manager,

or could affect the performance of the

account.

The Commission stated in the July

Release that if the sponsor or portfolio

manager of a program concluded that a

particular restriction sought to be

imposed by a client was unreasonable,

the client should be notified and given

an opportunity to restate the restriction

more reasonably. The Commission also

noted that if a client was unable or

unwilling to modify an unreasonable

restriction, then the client could be

removed from the program without

jeopardizing reliance on the safe

harbor.51 The Commission is also of the

view that if a sponsor or portfolio

manager is informed in advance that a

client wants to impose a restriction the

sponsor or portfolio manager deems

unreasonable, and the client refuses to

modify the restriction, then the sponsor

or portfolio manager may refuse to

accept the client. The Commission,

however, does not agree with the

suggestion of some commenters that a

sponsor or portfolio manager should be

permitted to refuse to accept a client

without giving the client an opportunity

to modify or withdraw the restriction.

4. Quarterly Account Statements

Paragraph (a)(4) of the revised

proposed rule stated that each client in

a program covered by the rule must be

provided quarterly with a statement

describing all activity in the client’s

account during the preceding quarter,

including all transactions made on

behalf of the account, all contributions

and withdrawals made by the client,

and all fees and expenses charged to the

account. The statement also would have

included the value of the account at

both the beginning and end of the

quarter. Some commenters asserted that

the rule should not specify the contents

of quarterly statements. The

Commission is not persuaded by this

argument. This provision, which is

consistent with several no-action letters

that had specified the contents of the

quarterly reports,52 reflects the view that

a key element of individualized

advisory services is an individualized

report about a client’s account. The

Commission therefore is adopting this

provision substantially as proposed,

with one modification clarifying that

statements may be sent more often than

quarterly.53

5. Minimum Account Size

The revised proposed rule would not

have specified a minimum size for

client accounts in a program.54 While

the Commission acknowledged in the

July Release that providing

individualized advice to a large number

of relatively small accounts may be so

costly and time-consuming as to render

individualized treatment impracticable,

it noted that the provisions of the

revised proposed rule should be

sufficient to ensure individualized

treatment, and that innovations in

computer technology may allow

portfolio managers to render

individualized treatment to relatively

small accounts on a cost-effective
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations 15105

55 July Release, supra note 5, at Section II.A.2.v.

56Rule 3a–4, as originally proposed, would have

provided that clients maintain to the extent

reasonably practicable all indicia of ownership of

the funds in their accounts, and specified certain

requisite attributes of ownership. 1980 Release,

supra note 10; paragraph (c) of rule 3a–4 as

originally proposed.

57Like the revised proposed rule, rule 3a–4 as

adopted does not provide that the client be the

record owner of the securities held in its account.

The Division has taken the position that an

investment advisory program would not be deemed

to be an investment company solely because

securities of clients participating in the program are

held in nominee or street name. United Missouri

Bank of Kansas City, n.a., supra note 2 (investment

company securities held in nominee name). See,

e.g., Manning & Napier Advisors, Inc., supra note

12 (non-investment company securities held in

nominee name).

58This commenter suggested that providing the

right to pledge securities in the account of a

retirement plan could cause the plan to lose its

status as a qualified plan under the Internal

Revenue Code. In general, a qualified plan must

provide that benefits under the plan may not be

anticipated, assigned, alienated, or subject to

attachment, garnishment, levy, execution, or other

legal process. See Internal Revenue Code (‘‘IRC’’)

Section 401(a)(13) [26 U.S.C. 401(a)(13)]; Treas. Reg.

§ 1.401(a)–13 (as amended by T.D. 8219, 53 FR

31837 (Aug. 22, 1988)). In addition, the IRC

imposes an additional tax of 10% on early

distributions from a qualified retirement plan. See

IRC Section 72(t)(1) [26 U.S.C. 72(t)(1)].

59Similarly, paragraph (a)(5) would not prohibit

a client from being charged reasonable fees for

services in connection with the ownership of

securities held in the program, provided such fees

could be charged if the client held the securities

outside the program. Of course, all fees must be

permissible under applicable state and federal law

and must be adequately disclosed. See Item 7 of

Schedule H of Form ADV.

60Paragraph (a)(5) of rule 3a–4, as adopted. The

rule’s text also has been changed to clarify that the

rule provides for the retention of only the rights of

ownership specified in the rule. Of course, nothing

in the rule is intended to prevent clients from

retaining other rights of ownership, if permitted by

the program.

61 July Release, supra note 5, at Section II.A.3.i.

62The Commission regards a client’s ability to

pledge securities in his or her account directly

without first withdrawing them as an additional

attribute of the client’s ownership of the securities.

While the absence of a right to pledge would not

cause a program to fall outside of rule 3a–4, a

client’s right to pledge securities may be relevant

to determining whether a program that is not

relying on the safe harbor would be considered to

be an investment company.

63 July Release, supra note 5, at Section II.A.3.ii.

64See infra Section II.D.3. Rule 3a–4, as adopted,

is in no way intended to indicate the instances

under which a client’s right to vote proxies may be

delegated to another person. Whether the right can

be delegated depends on applicable state and

federal law. An employee benefit plan subject to the

Employee Retirement Income Security Act of 1974

(‘‘ERISA’’), for example, may provide that the plan’s

named fiduciary may delegate asset management,

including the authority to vote proxies, to an

‘‘investment manager’’ for the plan, as that term is

defined in Section 3(38) of ERISA. See, e.g.,

Sections 402–405 of ERISA [29 U.S.C. §§ 1102–

1105]; Letter from Alan D. Lebowitz, Deputy

Assistant Secretary for Program Operations, U.S.

Department of Labor, to Robert A.G. Monks,

Institutional Shareholder Services, Inc. (Jan. 23,

1990), 1990 ERISA LEXIS 66. Certain provisions of

the federal securities laws also contemplate that

clients can delegate their right to vote proxies.

Under the Commission’s proxy rules, the term

‘‘beneficial owner,’’ the person who must receive

proxy materials, includes an investment adviser

that has the power to vote, or to direct the voting

of, a security pursuant to an agreement with the

client. See Securities Exchange Act Rule 14b–2(a)(2)

[17 CFR § 240.14b–2]. Rules adopted by the New

York Stock Exchange (‘‘NYSE’’), the National

Association of Securities Dealers, Inc. (‘‘NASD’’)

and the American Stock Exchange, Inc. (‘‘AMEX’’)

permit a securityholder to designate a registered

Continued

basis.55 Nonetheless, the Commission

requested comment whether the rule

should include a provision specifying a

minimum account size.

All but one of the commenters

responding to the request for comment

opposed the inclusion of a minimum

account size provision in rule 3a–4.

These commenters asserted that the

sponsor and the portfolio manager are in

the best position to determine the

appropriate minimum account size for a

program based upon the nature of the

program. The Commission has

concluded that a particular account size

is not a necessary element to ensure that

clients are provided with individualized

investment management services. The

Commission recognizes, however, that

the smaller the minimum account size

of an investment advisory program, the

more likely that clients would not have

the ability to demand and receive

individualized treatment in the

program. In assessing the status under

the Investment Company Act of a

program that does not qualify for the

safe harbor under rule 3a–4, therefore,

the Commission will consider a

relatively large minimum account size

as evidence that individualized

treatment is being provided to clients of

the program.

D. Client Retention of Ownership of

Securities

Under paragraph (a)(5) of the revised

proposed rule, a program covered by the

rule would have been characterized by

each client retaining certain specified

indicia of ownership of all securities

and funds in that client’s account.56 The

Commission stated in the July Release

that the indicia of ownership specified

in revised proposed rule 3a–4 are those

that provide clients with the ability to

act as owners of the securities in their

accounts.57

A number of commenters addressing

this aspect of the revised proposed rule

noted circumstances in which the

client’s ability to exercise ownership

rights over securities in his or her

account could be restricted for reasons

external to the program. One commenter

pointed out, for example, that the assets

in the account of a self-directed

retirement plan may be subject to

restrictions imposed by the terms of the

plan or by federal tax law.58 These

commenters were concerned that such

restrictions may preclude the program

from relying on the safe harbor.

Paragraph (a)(5) of rule 3a–4

contemplates only that the program

does not impose additional restrictions

or limitations on client ownership of

securities held in program accounts, and

that a client’s participation in the

program will not alter his or her ability

to exercise the ownership rights

enumerated in the rule.59 The language

of the rule has been modified to clarify

this standard.60

1. Ability to Withdraw and Pledge

Securities

The revised proposed rule would

have provided that clients be able to

withdraw securities or cash from their

accounts. In addition, revised proposed

rule 3a–4 also would have specified that

clients be able to pledge the securities

in their accounts. The July Release

stated that investment advisory

programs relying on the safe harbor

could require a client to withdraw

securities from his or her account before

using them as collateral.61

A number of commenters maintained

that the retention by clients of the right

to pledge securities should be

eliminated from the final rule. One of

these commenters asserted that, because

clients may be forced to withdraw their

securities before pledging them, the

provision of the revised proposed rule

regarding the right to pledge securities

is unnecessary if the client has the right

to withdraw them. The Commission

agrees, and has modified the rule text to

remove this provision.62

2. Right to Vote Securities and Receive

Certain Documents as Securityholders

The revised proposed rule would

have provided that the client have the

right to vote the securities in his or her

account. This provision would have

permitted clients to delegate the

authority to vote securities to another

person, such as the portfolio manager or

other fiduciary, so long as the client

retained the right to revoke the

delegation at any time. The Commission

indicated that the right to vote proxies

implied that the client would receive

proxy materials in sufficient time to

permit the client to consider how to

vote and to submit the proxies.63 The

Commission is clarifying that, if a client

delegates voting rights to another

person, the proxies, proxy materials,

and, if applicable, annual reports, need

be furnished only to the party exercising

the delegated voting authority.64
15106 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations

investment adviser who has discretion over the

management of the client’s account to receive and

vote proxies on his or her behalf. See NYSE Guide,

Rules of Board, Rules 450, 451, 452 and 465; NASD

Conduct Rules, Rule 2260; AMEX Rules 575, 576,

577 and 585.

65See infra Section II.D.3.

66 In the revised proposed rule, the paragraph

regarding receipt of documents specifically referred

to receipt by the client’s agent. Paragraph (a)(5)(iv)

of revised proposed rule 3a–4; July Release, supra

note 5, at Section II.A.3.iii. In connection with

modifying the rule text to effect the changes

discussed above, supra Section II.D, the reference

to the client’s agent has been deleted as a

conforming change. These changes in the rule text

are not intended to indicate that a client in an

investment advisory program may not designate

another person to receive documents that must be

provided to securityholders by law.

67 17 CFR 240.10b–10.

68Paragraph (a)(6) of rule 3a–4, as adopted. Banks

that execute securities transactions for customers

generally are subject to confirmation requirements

under the banking laws. See, e.g., 12 CFR 12.4–12.5

(Office of the Comptroller of the Currency (‘‘OCC’’)

confirmation requirements for national banks). The

OCC recently proposed amendments to these rules

that would make their confirmation requirements

more closely reflect the requirements of rule 10b–

10. OCC, Recordkeeping and Confirmation

Requirements for Securities Transactions (Dec. 7,

1995), 60 FR 66517 (Dec. 22, 1995). In addition, the

Federal Deposit Insurance Corporation (‘‘FDIC’’)

recently considered when and how to amend its

regulations governing recordkeeping and

confirmation requirements for securities

transactions by state nonmember banks (12 CFR

part 344). FDIC, Recordkeeping and Confirmation

Requirements for Securities Transactions (May 14,

1996), 61 FR 26135 (May 24, 1996).

69 July Release, supra note 5, at n.60 and

accompanying text, citing Securities Exchange Act

Release No. 34962 (Nov. 10, 1994), 59 FR 59612

(Nov. 17, 1994) (‘‘Exchange Act Release 34962’’).

70Although a client may waive his or her right to

receive the immediate confirmation, the client may

not waive his or her right to receive the periodic

statement. Exchange Act Release 34962, supra note

68, at nn.34–36 and accompanying text.

71One commenter observed that a person

executing transactions on behalf of a client whose

shares are held in nominee name may not know the

identity of the client, and asked the Commission to

clarify how a program relying on the safe harbor

could comply with the confirmation provision with

respect to such a client. In the case of transactions

effected by a registered broker-dealer, the Division

of Market Regulation has expressed the view that

a good faith effort should be made in these

circumstances to obtain the information necessary

to send the confirmation required by rule 10b–10

directly to the client. If these efforts are not

successful, then the confirmation should be sent, in

accordance with certain procedures, to the client’s

custodian or a fiduciary authorized to manage the

account. See Letter from Catherine McGuire, Chief

Counsel, Division of Market Regulation, U.S.

Securities and Exchange Commission, to George P.

Miller, Vice President and Associate General

Counsel, Public Securities Association (Sept. 29,

1995).

72See, e.g., Westfield Consultants Group, supra

note 3; Manning & Napier Advisors, Inc., supra note

12; Jeffries & Company, supra note 12; Rauscher

Pierce Refsnes, Inc., supra note 3.

Revised proposed rule 3a–4

contemplated that the client (or the

client’s agent) would be provided with

documents that the client (or agent)

would have received had the same

securities been owned by the client

outside the program. These documents

may include prospectuses, periodic

shareholder reports, proxy materials,

and any other information and

disclosure required by applicable laws

or regulations.

Some commenters suggested that

clients be permitted to waive receipt of

the documents generally required to be

provided to securityholders, as they

could have waived receipt of immediate

confirmations under the revised

proposed rule.65 Rule 3a–4 does not

limit a client’s right to waive receipt of

these documents. Nor does rule 3a–4

prohibit a client from making an

informed designation of another person,

including a financial planner or

registered broker-dealer, to receive such

documents on the client’s behalf.66

Whether a client in an investment

advisory program may waive receipt of

documents or designate another person

to receive documents depends upon

whether the client would have been able

to do so under applicable federal or

state law if the securities were owned

directly.

3. Right to Receive Trade Confirmations

The revised proposed rule contained

a provision under which a client would

have the right to receive in a timely

manner confirmations of securities

transactions of the type required by rule

10b–10 under the Securities Exchange

Act of 1934.67 Two commenters objected

to the provision of the rule that the

confirmations be ‘‘of the type required

by rule 10b–10.’’ These commenters

asserted that this provision was

burdensome, particularly with respect

to banks and trust companies that are

not subject to rule 10b–10. The

Commission has decided that the

confirmation provision, like the other

indicia of ownership specified in the

rule, should apply only to the extent

that the client would have a right to

receive confirmations from the person

executing the transaction if he or she

traded the securities through that person

outside the program. Therefore, the

Commission has revised the provision

of the rule addressing confirmations to

delete the reference to rule 10b–10. As

revised, this provision would state that

a client in an investment advisory

program must receive confirmations that

the person executing the transaction is

required to send under the laws

regulating that person’s activities. This

provision of the rule also provides that

the confirmations must include the

information specified by the applicable

law governing such content.68

As discussed in the July Release, rule

10b–10 permits customers of registered

broker-dealers to waive receipt of

individual confirmations in certain

circumstances.69 A client in an

investment advisory program whose

transactions are executed by a registered

broker-dealer effectively has the option

to receive either individual

confirmations for each transaction or

periodic statements, delivered no less

frequently than quarterly, that include

the information required by rule 10b–10

with respect to all transactions that

occurred within the period covered by

the statement.70 Two commenters

suggested that the Commission clarify

that an entity that is not required to be

registered with the Commission as a

broker-dealer could rely on the safe

harbor if it sent quarterly statements to

clients who waived their rights to

receive individual confirmations. As

discussed above, the confirmation

provision in rule 3a–4 applies only to

the extent that the client would have a

right to receive confirmations if he or

she traded the securities outside the

program. A client’s ability to waive

receipt of confirmations will not be

altered because securities are held in a

program account. Whether a client

whose transactions are not executed by

a registered broker-dealer may waive

receipt of confirmations or other

transaction notifications must be

determined by reference to the laws that

govern the relationship.71

4. Legal Rights as Securityholders

Revised proposed rule 3a–4 would

have provided that the client retain the

right to proceed directly against an

issuer of securities in a client’s account

without joining any other person

involved in the program. The July

Release indicated that underlying this

provision (which was based on

representations made in several noaction letters) 72 was the view that a key

element of providing individualized

advisory services is that a client have

the same rights as a person holding the

securities outside an investment

advisory program.

Certain commenters suggested that

this provision of the revised proposed

rule may be problematic with respect to

client securities that are held in

nominee or street name, or by a trustee.

These commenters stated that the

nominee or trustee might be considered

an indispensable party in any action

against the issuer, and that nominal

joinder of the nominee or trustee might

be required. These comments have been

addressed by the revision discussed

above regarding restrictions on the

exercise of ownership rights that are
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations 15107

73See supra Section II.D.

74Paragraph (a)(5)(iv) of rule 3a–4, as adopted.

75 July Release, supra note 5, at Section II.A.4.

76See rule 3a–1 (certain prima facie investment

companies); rule 3a–2 (transient investment

companies); rule 3a–3 (certain investment

companies owned by companies that are not

investment companies); rule 3a–5 (exemption for

subsidiaries organized to finance the operations of

domestic or foreign companies); rule 3a–6 (foreign

banks and foreign insurance companies); and rule

3a–7 (issuers of asset-backed securities).

77For instance, paragraph (a)(7) of rule 204–2 [17

CFR 275.204–2(a)(7)] generally requires a registered

adviser to maintain originals of all written

communications received and copies of all written

communication sent by the adviser relating to the

adviser’s advice or recommendations. Under

section 204 of the Advisers Act, records maintained

under rule 204–2 must be made available to

Commission examiners.

78Section 203(e)(5) of the Advisers Act [15 U.S.C.

80b–3(e)(5)] provides that no person will be deemed

to have failed to supervise another person subject

to his or her supervision if: (1) the person has

established procedures that would reasonably be

expected to prevent or detect the other person’s

violation, and a system for applying such

procedures; and (2) the supervisor reasonably

discharged his or her duties under the procedures

and system and did not have reasonable cause to

believe that such procedures were not being

complied with.

external to the program.73 Otherwise,

the Commission is adopting this

provision as proposed.74

E. Policies and Procedures and Form N–

3a4

Paragraph (a)(6) of revised proposed

rule 3a–4 contemplated the

establishment by a program’s sponsor of

written procedures and agreements

governing the operation of the program,

and the maintenance of records relating

to the program. Paragraph (a)(6) would

have provided that the sponsor must: (1)

Establish and effect written policies and

procedures that are reasonably designed

to ensure that each of the provisions of

the rule are implemented; (2) maintain

and preserve all written policies,

procedures and certain other documents

relating to the program for specified

periods of time; (3) enter into written

agreements with other persons that the

sponsor designates to retain records

pertaining to the program; and (4)

furnish to the Commission upon

demand copies of the policies,

procedures and other documents

created pursuant to these policies and

procedures. Paragraph (a)(7) of the

revised proposed rule would have

provided that the sponsor of an

investment advisory program intending

to rely on the safe harbor file Form N–

3a4 with the Commission.

In the July Release, the Commission

specifically requested comment whether

any of the provisions under paragraph

(a)(6) of the rule could be ‘‘eliminated,

consolidated, or otherwise made less

burdensome without compromising

investor protection.’’ 75 Most

commenters addressing this aspect of

the revised proposed rule viewed the

provisions as unnecessary, unduly

burdensome, irrelevant to determining

whether an investment advisory

program is an investment company

under the Investment Company Act, or

as an improper attempt by the

Commission to regulate entities—

principally banks—that are excepted

from the definition of investment

adviser under the Advisers Act. A few

commenters also suggested that

provisions setting forth written policies

and procedures would discourage

sponsors from relying on the safe

harbor. For similar reasons, most

commenters also opposed any filing

provision under the rule.

Although the Commission does not

agree with many of the comments

pertaining to the proposed

recordkeeping and other operational

provisions, the Commission has

reevaluated these provisions and

determined not to adopt them for a

number of reasons. First, the

Commission agrees that compliance

with these types of formal procedural

provisions generally should not be

determinative of an entity’s status under

the Investment Company Act. As one

commenter noted, none of the other

rules under the Investment Company

Act exempting certain entities from

investment company regulation contain

similar procedural provisions.76

Second, with respect to programs

sponsored by registered investment

advisers, the recordkeeping

requirements under the Advisers Act

and the Commission’s authority to

examine registered investment advisers

should be sufficient to enable the

Commission to detect violations of the

Investment Company Act. Most, if not

all, of the records that would have been

covered by the revised proposed rule

currently are required to be maintained

under rule 204–2 under the Advisers

Act.77

With respect to those investment

advisory programs sponsored by banks

that are not subject to the Advisers Act,

the Commission staff intends to consult

and work closely with the relevant

banking agencies so that these programs

will be subject to oversight designed to

determine whether the programs are

being operated as unregistered

investment companies. Further, to the

extent these programs include registered

investment companies as investment

vehicles for their clients, or that

registered investment advisers serve as

subadvisers in a program sponsored by

a bank, the Commission will have

access to certain records relating to the

programs through its authority to

examine such registered entities.

Despite its determination not to

include in rule 3a–4 a provision

pertaining to written policies and

procedures, the Commission continues

to believe that it is important for the

sponsor of an investment advisory

program to monitor the program’s

compliance with the rule. Each person

relying on rule 3a–4 is responsible for

demonstrating its compliance with the

rule’s provisions. A sponsor that

establishes and implements written

policies and procedures designed to

ensure adherence to the provisions of

rule 3a–4 would greatly reduce the

chance that the program will fail to

operate in the manner specified in the

rule. Moreover, the implementation of

such procedures by an investment

adviser may serve to protect the adviser

in certain instances from liability for

violating, or aiding and abetting

violations of, the Investment Company

Act and/or the Securities Act, or failing

to supervise a person under the

adviser’s supervision who violates those

Acts.78 The Commission, therefore,

strongly recommends that a sponsor of

an advisory program seeking to rely on

rule 3a–4 establish and implement

written policies and procedures, and a

system for applying such procedures,

that are reasonably designed to ensure

that the program operates in the manner

contemplated by the rule.

The Commission also believes that it

would be advisable for a person seeking

to rely on rule 3a–4 to maintain the

records necessary to evidence

compliance with the rule, even if the

person is not subject to rule 204–2

under the Advisers Act or certain of the

records are not required by that rule. As

noted above, a person seeking to rely on

rule 3a–4 must be able to establish

compliance with each of the rule’s

provisions. Compliance with many of

these provisions, including those

relating to client contact, the delivery of

documents to clients, and the

opportunity of clients to place

reasonable restrictions on the

management of their accounts, would be

difficult, if not impossible, to

demonstrate without contemporaneous

recordkeeping.

F. Investment Advisers Act Issues

Raised by Investment Advisory

Programs

The Commission noted in the July

Release that wrap fee and other

investment advisory programs raise, in

addition to the Investment Company
15108 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations

79 July Release, supra note 5, at Section II.C.

80See supra Section II.C.4.

81See supra Section II.E.

Act issues addressed in the release, a

number of issues under the Advisers

Act. The Commission requested

comment on certain of these issues and

indicated the possible publication of an

interpretive release that would address

them. 79 The Commission received few

comments in response to this request,

and the comments that were received

suggested that investment advisory

programs did not raise unique issues

under the Advisers Act, but simply

presented issues under the Act in a

specific factual context. The

Commission, therefore, has decided not

to publish an interpretive release at this

time. The staff of the Division will

entertain requests for no-action or

interpretive guidance with respect to the

application of the Advisers Act in the

context of investment advisory

programs.

III. Cost/Benefit Analysis

Rule 3a–4 under the Investment

Company Act provides a nonexclusive

safe harbor from the definition of

investment company for investment

advisory programs. Programs that are

organized and operated in the manner

described in the rule are not required to

register under the Investment Company

Act or to comply with the Act’s

substantive provisions. The rule is

intended to provide guidance to persons

operating investment advisory programs

regarding the status of these programs

under the Investment Company Act, and

help to ensure that such programs do

not operate as investment companies

without clients of the programs

benefitting from the Act’s protections.

The Commission anticipates that the

cost of compliance with rule 3a–4 will

be small. In addition, the Commission

does not believe that compliance with

any of the provisions will be unduly

burdensome. Furthermore, because the

rule is based principally on longstanding staff positions, the Commission

believes that it will not substantially

alter current industry practice or the

costs associated therewith.

Section 2(c) of the Investment

Company Act provides that whenever

the Commission is engaged in

rulemaking under the Investment

Company Act and is required to

consider or determine whether an action

is consistent with the public interest,

the Commission also must consider, in

addition to the protection of investors,

whether the action will promote

efficiency, competition, and capital

formation. The Commission has

considered rule 3a–4 in light of these

standards and believes that, by

removing uncertainty with respect to

the status of certain investment advisory

programs under the Investment

Company Act, the rule is consistent

with the public interest, and will

promote efficiency and the competition

among sponsors of such programs. In

addition, the rule will have no adverse

effect on capital formation, nor be

unduly burdensome to those sponsors

wishing to comply with the rule.

IV. Paperwork Reduction Act

An investment advisory program

structured to take advantage of the safe

harbor contained in rule 3a–4 will

provide for each client in the program

receiving a statement quarterly

describing all activities in the client’s

account during the preceding quarter.

Such a provision constitutes a

‘‘collection of information’’ requirement

within the meaning of the Paperwork

Reduction Act of 1995 (44 U.S.C. 3501,

et seq.), 80 because providing the

quarterly statements is necessary to

meet the provisions of the safe harbor.

An agency may not conduct or sponsor,

and a person is not required to respond

to, a collection of information without

display of a valid OMB control number.

Accordingly, the Commission submitted

the revised proposed rule to the Office

of Management and Budget (‘‘OMB’’)

pursuant to 44 U.S.C. 3507 and received

approval of the rule’s ‘‘collection of

information’’ requirement (OMB control

number 3235–0459). Because the

collection of information requires

disclosure to third parties (the client

accountholders), assurance of

confidentiality is not an issue.

As noted above, the Commission has

determined not to adopt the other

collection of information requirements

it proposed, including the establishment

of written procedures and agreements

governing the operation of the program,

the maintenance of records relating to

the program, and the filing of Form N–

3a4 with the Commission.81 Due to this

decision, as well as a revision to the

Commission’s estimate of the amount of

assets presently in investment advisory

programs, the Commission has revised

its estimate of the paperwork burden.

The total aggregate estimated annual

reporting burden associated with the

rule’s requirements has been reduced by

152,724.5 hours. The potential

respondents are the approximately 53

sponsors of investment advisory

programs. The Commission now

estimates that there are 1,016,000 clients

of investment advisory programs, and

the reporting burden imposed by rule

3a–4 is one hour per client, for a total

aggregate annual reporting burden of

1,016,000 hours. On average, the annual

reporting burden for each respondent is

estimated to be 19,169.8 hours. The

Commission notes that many sponsors

already may provide quarterly

statements to clients and the burden

under paragraph (a)(4) of rule 3a–4 is

likely to be less for such sponsors.

V. Final Regulatory Flexibility Analysis

A summary of the Initial Regulatory

Flexibility Analysis regarding revised

proposed rule 3a–4 was published in

the July Release. No comments were

received on the Initial Regulatory

Flexibility Analysis, and no comments

were received with respect to the effect

of the rule on small entities. The

Commission has prepared a Final

Regulatory Flexibility Analysis in

accordance with 5 U.S.C. 604 regarding

rule 3a–4.

The analysis states that the rule is

intended to provide a nonexclusive safe

harbor from the definition of investment

company for certain programs under

which investment advisory services are

provided to clients. The analysis notes

that the objective of rule 3a–4 is to help

ensure that investment advisory

programs do not operate as de facto

investment companies by clarifying the

Commission’s views regarding the status

of investment advisory programs under

the federal securities laws. The

conditions of the rule are designed to

describe certain basic attributes that can

differentiate an investment advisory

program from an investment company.

As discussed more fully in the analysis,

because the rule is a nonexclusive safe

harbor, no entity, either large or small,

is required to operate in accordance

with its terms, and notes that a program

that is a small entity and that does not

operate in the manner contemplated by

the rule is not presumed to be an

investment company.

As discussed in the analysis, the

Commission estimates that of the 53

sponsors offering investment advisory

programs in 1995, approximately 6

programs met the Commission’s

definition of small entity for purposes of

the Investment Company Act (i.e., an

investment company with net assets of

$50 million or less as of its most recent

fiscal year [17 CFR 270.0–10]).

The analysis states that the rule does

not impose any reporting or

recordkeeping requirements with the

exception of one condition which

requires programs relying on the rule to

furnish its clients a statement, at least

quarterly, describing activity in the

client’s account. This condition reflects

representations in several no-action
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations 15109

letters and is consistent with industry

practice. In addition, the analysis notes

that the Commission has attempted to

minimize the rule’s burden on all

persons, not just small entities,

particularly by eliminating provisions

included in the Revised Proposed Rule

relating to the creation and maintenance

of books and records to facilitate and

support a program’s reliance on the rule,

and to the filing of a form with the

Commission. The analysis also notes

that alternatives for providing different

means of compliance for small entities

were considered, but that the rule is

crafted in a manner designed to permit

program sponsors considerable

flexibility as to how they comply with

the safe harbor’s conditions.

Furthermore, the analysis states that

exempting small entities from the

conditions of the rule would be

inconsistent with the Commission’s

statutory authority to protect investors.

Cost/benefit information reflected in the

‘‘Cost/Benefit Analysis’’ section of this

Release also is reflected in the analysis.

A copy of the Final Regulatory

Flexibility Analysis may be obtained by

contacting Rochelle Kauffman Plesset,

Securities and Exchange Commission,

450 Fifth Street, N.W., Mail Stop 10–6,

Washington, D.C. 20549.

VI. Effective Date

Rule 3a–4 is effective upon

publication in the Federal Register.

Pursuant to 5 U.S.C. 553(d)(1),

immediate effectiveness is appropriate

because rule 3a–4 is purely exemptive

in nature. It provides a nonexclusive

safe harbor from the definition of

investment company for certain

programs under which investment

advisory services are provided to

advisory clients. Under the rule,

programs that are organized and

operated in the manner described in the

rule are not required to register under

the Investment Company Act or to

comply with the Act’s requirements.

The benefits of the rule should be

available at the earliest possible time.

VII. Statutory Authority

The Commission is adopting rule

3a–4 pursuant to the authority set forth

in sections 6(c) and 38(a) of the

Investment Company Act [15 U.S.C.

80a–6(c), –37(a)].

Text of Rule

List of Subjects in 17 CFR Parts 270 and

274

Investment companies, Reporting and

recordkeeping requirements, Securities.

For the reasons set out in the

preamble, title 17, chapter II of the Code

of Federal Regulations is amended as

follows:

PART 270—RULES AND

REGULATIONS, INVESTMENT

COMPANY ACT OF 1940

1. The authority citation for Part 270

continues to read, in part, as follows:

Authority: 15 U.S.C. 80a–1 et seq., 80a–37,

80a–39 unless otherwise noted;

* * * * *

2. By adding § 270.3a–4 to read as

follows:

§ 270.3a–4 Status of investment advisory

programs.

Note: This section is a nonexclusive safe

harbor from the definition of investment

company for programs that provide

discretionary investment advisory services to

clients. There is no registration requirement

under section 5 of the Securities Act of 1933

[15 U.S.C. 77e] with respect to programs that

are organized and operated in the manner

described in § 270.3a–4. The section is not

intended, however, to create any

presumption about a program that is not

organized and operated in the manner

contemplated by the section.

(a) Any program under which

discretionary investment advisory

services are provided to clients that has

the following characteristics will not be

deemed to be an investment company

within the meaning of the Act [15 U.S.C.

80a, et seq.]:

(1) Each client’s account in the

program is managed on the basis of the

client’s financial situation and

investment objectives and in accordance

with any reasonable restrictions

imposed by the client on the

management of the account.

(2)(i) At the opening of the account,

the sponsor or another person

designated by the sponsor obtains

information from the client regarding

the client’s financial situation and

investment objectives, and gives the

client the opportunity to impose

reasonable restrictions on the

management of the account;

(ii) At least annually, the sponsor or

another person designated by the

sponsor contacts the client to determine

whether there have been any changes in

the client’s financial situation or

investment objectives, and whether the

client wishes to impose any reasonable

restrictions on the management of the

account or reasonably modify existing

restrictions;

(iii) At least quarterly, the sponsor or

another person designated by the

sponsor notifies the client in writing to

contact the sponsor or such other person

if there have been any changes in the

client’s financial situation or investment

objectives, or if the client wishes to

impose any reasonable restrictions on

the management of the client’s account

or reasonably modify existing

restrictions, and provides the client

with a means through which such

contact may be made; and

(iv) The sponsor and personnel of the

manager of the client’s account who are

knowledgeable about the account and

its management are reasonably available

to the client for consultation.

(3) Each client has the ability to

impose reasonable restrictions on the

management of the client’s account,

including the designation of particular

securities or types of securities that

should not be purchased for the

account, or that should be sold if held

in the account; Provided, however, that

nothing in this section requires that a

client have the ability to require that

particular securities or types of

securities be purchased for the account.

(4) The sponsor or person designated

by the sponsor provides each client with

a statement, at least quarterly,

containing a description of all activity

in the client’s account during the

preceding period, including all

transactions made on behalf of the

account, all contributions and

withdrawals made by the client, all fees

and expenses charged to the account,

and the value of the account at the

beginning and end of the period.

(5) Each client retains, with respect to

all securities and funds in the account,

to the same extent as if the client held

the securities and funds outside the

program, the right to:

(i) Withdraw securities or cash;

(ii) Vote securities, or delegate the

authority to vote securities to another

person;

(iii) Be provided in a timely manner

with a written confirmation or other

notification of each securities

transaction, and all other documents

required by law to be provided to

security holders; and

(iv) Proceed directly as a security

holder against the issuer of any security

in the client’s account and not be

obligated to join any person involved in

the operation of the program, or any

other client of the program, as a

condition precedent to initiating such

proceeding.

(b) As used in this section, the term

sponsor refers to any person who

receives compensation for sponsoring,

organizing or administering the

program, or for selecting, or providing

advice to clients regarding the selection

of, persons responsible for managing the

client’s account in the program. If a

program has more than one sponsor, one

person shall be designated the principal

sponsor, and such person shall be
15110 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations

considered the sponsor of the program

under this section.

By the Commission.

Dated: March 24, 1997.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–8075 Filed 3–28–97; 8:45 am]

BILLING CODE 8010–01–P

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Food and Drug Administration

21 CFR Parts 5, 184, 529, and 610

Food and Drugs; Technical

Amendments

AGENCY: Food and Drug Administration,

HHS.

ACTION: Final rule; technical

amendments.

SUMMARY: The Food and Drug

Administration (FDA) is amending its

regulations to correct certain

typographical and other inadvertent

errors. This action is being taken to

clarify and improve the accuracy of the

regulations.

EFFECTIVE DATE: April 1, 1997.

FOR FURTHER INFORMATION CONTACT:

LaJuana D. Caldwell, Office of Policy

(HF–27), Food and Drug

Administration, 5600 Fishers Lane,

Rockville, MD 20857, 301–443–2994.

SUPPLEMENTARY INFORMATION: FDA has

discovered certain nonsubstantive errors

that have been incorporated into the

agency’s codified regulations. FDA is

correcting these errors. The errors in the

regulations are as follows:

1. In 21 CFR 5.89(b)(1) ‘‘x-reay’’ is

corrected to read ‘‘x-ray’’.

2. In 21 CFR 184.1(a) the phrase ‘‘of

this chapter of’’ in the third sentence is

corrected to read ‘‘of this chapter or’’.

3. In 21 CFR 529.50(c)(2) ‘‘Klebsiella

ssp.’’ is corrected to read ‘‘Klebsiella

spp.’’.

4. In 21 CFR 610.53(c), in the table,

in the entry for ‘‘Rubella Virus Vaccine

Live,’’ in the third column, under the

heading ‘‘Manufacturer’s storage period

0 °C or colder (unless otherwise

stated),’’ ‘‘°C’’ is corrected to read ‘‘do’’.

Publication of this document

constitutes final action on these changes

under the Administrative Procedure Act

(5 U.S.C. 553). Notice and public

procedure are unnecessary because FDA

is merely correcting nonsubstantive

errors.

List of Subjects

21 CFR Part 5

Authority delegations (Government

agencies), Imports, Organization and

functions (Government agencies).

21 CFR Part 184

Food ingredients.

21 CFR Part 529

Animal drugs.

21 CFR Part 610

Biologics, Labeling, Reporting and

recordkeeping requirements. Therefore, under the Federal Food,

Drug, and Cosmetic Act, and under

authority delegated to the Commissioner

of Food and Drugs, 21 CFR parts 5, 184,

529, and 610 are amended as follows:

PART 5—DELEGATIONS OF

AUTHORITY AND ORGANIZATION

1. The authority citation for 21 CFR

part 5 continues to read as follows:

Authority: 5 U.S.C. 504, 552, App. 2; 7

U.S.C. 138a, 2271; 15 U.S.C. 638, 1261–1282,

3701–3711a; secs. 2–12 of the Fair Packaging

and Labeling Act (15 U.S.C. 1451–1461); 21

U.S.C. 41–50, 61–63, 141–149, 467f, 679(b),

801–886, 1031–1309; secs. 201–903 of the

Federal Food, Drug, and Cosmetic Act (21

U.S.C. 321–394); 35 U.S.C. 156; secs. 301,

302, 303, 307, 310, 311, 351, 352, 361, 362,

1701–1706, 2101 of the Public Health Service

Act (42 U.S.C. 241, 242, 242a, 242l, 242n,

243, 262, 263, 264, 265, 300u–300u–5,

300aa–1); 42 U.S.C. 1395y, 3246b, 4332,

4831(a), 10007–10008; E.O. 11490, 11921,

and 12591.

§ 5.89 [Amended]

2. Section 5.89 Notification of defects

in, and repair or replacement of,

electronic products is amended in

paragraph (b)(1) by removing ‘‘x-reay’’

and adding in its place ‘‘x-ray’’.

PART 184—DIRECT FOOD

SUBSTANCES AFFIRMED AS

GENERALLY RECOGNIZED AS SAFE

3. The authority citation for 21 CFR

part 184 continues to read as follows:

Authority: Secs. 201, 402, 409, 701 of the

Federal Food, Drug, and Cosmetic Act (21

U.S.C. 321, 342, 348, 371).

§ 184.1 [Amended]

4. Section 184.1 Substances added

directly to human food affirmed as

generally recognized as safe (GRAS) is

amended in the third sentence in

paragraph (a) by removing the phrase

‘‘of this chapter of’’ and adding in its

place the phrase ‘‘of this chapter or’’.

PART 529—CERTAIN OTHER DOSAGE

FORM NEW ANIMAL DRUGS

5. The authority citation for 21 CFR

part 529 continues to read as follows:

Authority: Sec. 512 of the Federal Food,

Drug, and Cosmetic Act (21 U.S.C. 360b).

§ 529.50 [Amended]

6. Section 529.50 Amikacin sulfate

intrauterine solution is amended in

paragraph (c)(2) by removing ‘‘Klebsiella

ssp.’’ and adding in its place ‘‘Klebsiella

spp.’’

PART 610—GENERAL BIOLOGICAL

PRODUCTS STANDARDS

7. The authority citation for 21 CFR

part 610 continues to read as follows:

Authority: Secs. 201, 501, 502, 503, 505,

510, 701 of the Federal Food, Drug, and

Cosmetic Act (21 U.S.C. 321, 351, 352, 353,

355, 360, 371); secs. 215, 351, 352, 353, 361

of the Public Health Service Act (42 U.S.C.

216, 262, 263, 263a, 264).

§ 610.53 [Amended]

8. § 610.53 Dating periods for licensed

biological products is amended in the

table in paragraph (c), in the entry for

‘‘Rubella Virus Vaccine Live,’’ in the

third column, under the heading

‘‘Manufacturer’s storage period 0 °C or

colder (unless otherwise stated),’’ by

removing ‘‘°C’’ and adding in its place

‘‘do’’.

Dated: March 25, 1997.

William B. Schultz,

Deputy Commissioner for Policy.

[FR Doc. 97–7971 Filed 3–28–97; 8:45 am]

BILLING CODE 4160–01–F

21 CFR Part 310

[Docket Nos. 91P–0186 and 93P–0306]

Iron-Containing Supplements and

Drugs: Label Warning Statements and

Unit-Dose Packaging Requirements;

Correction

AGENCY: Food and Drug Administration,

HHS.

ACTION: Final rule; correction.

SUMMARY: The Food and Drug

Administration (FDA) is correcting a

final rule that appeared in the Federal

Register of January 15, 1997 (62 FR

2218). The final rule amended the

regulations to require label warning

statements on products taken in solid

oral dosage form to supplement the

dietary intake of iron or to provide iron

for therapeutic purposes and to require

unit dose packaging for iron-containing

products that contain 30 milligrams or

more of iron per dosage unit. The final

rule was published with some

typographical errors. This document

corrects those errors.

DATES: Effective July 15, 1997.

FOR FURTHER INFORMATION CONTACT:

Linda S. Kahl, Center for Food Safety

and Applied Nutrition (HFS–206), Food

and Drug Administration, 200 C St. SW.,

Washington, DC 20204, 202–418–3101.

SUPPLEMENTARY INFORMATION: