Document ID: SEC-2016-2153-0001
Agency: sec
Document Type: Notice
Title: Applications: UBS Financial Services Inc.
Posted Date: 2016-12-07T05:00Z

[Federal Register Volume 81, Number 235 (Wednesday, December 7, 2016)]
[Notices]
[Pages 88286-88289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29299]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. IA-4580; File No. 803-00235]

UBS Financial Services Inc.; Notice of Application

December 1, 2016.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an exemptive order under section 206A 
of the Investment Advisers Act of 1940 (``Advisers Act'') providing an 
exemption from the written disclosure and consent requirements of 
section 206(3).

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Applicant: UBS Financial Services Inc. (``Applicant'').

Relevant Advisers Act Sections: Exemption requested under section 206A 
from the written disclosure and consent requirements of section 206(3).

Summary of Application: Applicant requests that the Commission issue an 
order under section 206A exempting it and Future Advisers (as defined 
below) from the written disclosure and consent requirements of section 
206(3) with respect to principal transactions with nondiscretionary 
advisory client accounts.

Filing Dates: The application was filed on November 22, 2016.

Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving Applicant with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on December 27, 2016, and should be accompanied by proof of 
service on Applicant, in the form of an affidavit or, for lawyers, a 
certificate of service. Pursuant to rule 0-5 under the Advisers Act, 
hearing requests should state the nature of the writer's interest, any 
facts bearing upon the desirability of a hearing on the matter, the 
reason for the request, and the issues contested. Persons who wish to 
be notified of a hearing may request notification by writing to the 
Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street NE., Washington, DC 20549-1090. Applicant, Laura E. Flores and 
Steven W. Stone, Morgan, Lewis & Bockius LLP, 1111 Pennsylvania Ave. 
NW., Washington, DC 20004.

FOR FURTHER INFORMATION CONTACT:  Robert Shapiro, Senior Counsel, at 
(202) 551-7758 (Chief Counsel's Office, Division of Investment 
Management) or Melissa Harke, Senior Special Counsel, at (202) 551-6787 
(Investment Adviser Regulation Office, Division of Investment 
Management).

SUPPLEMENTARY INFORMATION:  The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site at http://www.sec.gov/rules/iareleases.shtml or 
by calling (202) 551-8090.
    Applicant seeks relief from the written disclosure and consent 
requirements of section 206(3) of the Advisers Act that would be 
similar to relief currently provided by Advisers Act rule 206(3)-3T 
(the ``Rule''), which will expire by its terms on December 31, 2016. 
The relief sought by Applicant, if granted, would be subject to 
conditions similar to those under the Rule, as well as certain revised 
or additional conditions.

Applicant's Representations

    1. The Applicant is registered as an investment adviser with the 
Commission and is a registered broker-dealer. The Applicant is a 
subsidiary of UBS AG, a diversified financial services company with 
operations around the world. The Applicant offers a number of advisory 
programs, including the UBS Strategic Advisor Program (the 
``Program''), a nondiscretionary advisory program.
    2. In 2007, many of the Applicant's fee-based brokerage accounts 
were converted to nondiscretionary advisory accounts in the Program, 
following the invalidation of former rule 202(a)(11)-1 under the 
Advisers Act. When these accounts had been fee-based brokerage 
accounts, the Applicant, in its capacity as a broker-dealer, engaged in 
principal transactions with its customers in accordance with applicable 
law. The Applicant currently relies on the Rule to engage in principal 
transactions with its client accounts in the Program.
    3. The Applicant currently has approximately 115,982 client 
accounts enrolled in the Program. Those accounts have approximately $65 
billion in assets under management as of September 20, 2016. In the 
period January 1, 2015 through December 31, 2015, 11,619 trades were 
effected in reliance on the Rule in the Program. Approximately 66% 
percent of the trades done in reliance on the Rule in this period were 
purchases by client accounts; the average purchase was approximately 
$109,838. Approximately 34% percent of the trades done in reliance on 
the Rule in this period were sales from client accounts; the average 
sale was approximately $105,022.

[[Page 88287]]

    4. As permitted under the Rule, the Applicant has engaged in 
principal trades in investment-grade fixed income securities 
underwritten by the Applicant or an affiliate.
    5. The Applicant acknowledges that the Order, if granted, would not 
be construed as relieving in any way the Applicant from acting in the 
best interests of an advisory client, including fulfilling the duty to 
seek the best execution for the particular transaction for the advisory 
client; nor shall it relieve the Applicant from any obligation that may 
be imposed by sections 206(1) or (2) of the Advisers Act or by other 
applicable provisions of the federal securities laws or applicable 
FINRA rules.

Applicant's Legal Analysis

    1. Section 206(3) provides that it is unlawful for any investment 
adviser, directly or indirectly, acting as principal for its own 
account, knowingly to sell any security to or purchase any security 
from a client, without disclosing to the client in writing before the 
completion of the transaction the capacity in which the adviser is 
acting and obtaining the client's consent to the transaction. Rule 
206(3)-3T deems an investment adviser to be in compliance with the 
provisions of section 206(3) of the Advisers Act when the investment 
adviser, or a person controlling, controlled by, or under common 
control with the investment adviser, acting as principal for its own 
account, sells to or purchases from an advisory client any security, 
provided that the investment adviser complies with the conditions of 
the Rule.
    2. Rule 206(3)-3T requires, among other things, that the investment 
adviser obtain a client's written, revocable consent prospectively 
authorizing the adviser, directly or indirectly, acting as principal 
for its own account, to sell any security to or purchase any security 
from the client. The consent must be obtained after the adviser 
provides the client with written disclosure about: (i) The 
circumstances under which the investment adviser may engage in 
principal transactions with the client; (ii) the nature and 
significance of the conflicts the investment adviser has with its 
client's interests as a result of those transactions; and (iii) how the 
investment adviser addresses those conflicts. The investment adviser 
also must provide trade-by-trade disclosure to the client, before the 
execution of each principal transaction, of the capacity in which the 
adviser may act with respect to the transaction, and obtain the 
client's consent (which may be written or oral) to the transaction. The 
Rule is available only to an investment adviser that is also a broker-
dealer registered under section 15 of the Securities Exchange Act of 
1934 (``Exchange Act'') and may only be relied upon with respect to a 
nondiscretionary account that is a brokerage account subject to the 
Exchange Act, and the rules thereunder, and the rules of the self-
regulatory organization(s) of which it is a member. Rule 206(3)-3T is 
not available for principal transactions if the investment adviser or a 
person who controls, is controlled by, or is under common control with 
the adviser (``control person'') is the issuer or is an underwriter of 
the security, except that an adviser may rely on the Rule for trades in 
which the adviser or a control person is an underwriter of non-
convertible investment-grade debt securities.
    3. The investment adviser also must provide to the client a trade 
confirmation that, in addition to the requirements of rule 10b-10 under 
the Exchange Act, includes a conspicuous, plain English statement 
informing the client that the investment adviser disclosed to the 
client before the execution of the transaction that the investment 
adviser may act as principal in connection with the transaction, that 
the client authorized the transaction, and that the investment adviser 
sold the security to or bought the security from the client for its own 
account. The investment adviser also must deliver to the client, at 
least annually, a written statement listing all transactions that were 
executed in the account in reliance on the Rule, including the date and 
price of each transaction.
    4. Rule 206(3)-3T is scheduled to expire on December 31, 2016. Upon 
expiration, the Applicant would be required to provide trade-by-trade 
written disclosure to each nondiscretionary advisory client with whom 
the Applicant sought to engage in a principal transaction in accordance 
with section 206(3). The Applicant submits that its nondiscretionary 
clients, through the Applicant's current reliance on the Rule, have had 
access to the Applicant's inventory through principal transactions for 
a number of years, and expect to continue to have such access in the 
future. The Applicant believes that engaging in principal transactions 
with its clients provides certain benefits to its clients, including 
access to securities of limited availability, such as municipal bonds, 
and that the written disclosure and client consent requirements of 
section 206(3) act as an operational barrier to its ability to engage 
in principal trades with its clients, especially when the transaction 
involves securities of limited availability.
    5. Unless the Applicant is provided an exemption from the written 
disclosure and client consent requirements of section 206(3), Applicant 
believes that it will be unable to provide the same range of services 
and access to the same types of securities to its nondiscretionary 
advisory clients as it currently is able to provide to clients under 
the Rule.
    6. The Applicant notes that, if the requested relief is granted, it 
will remain subject to the fiduciary duties that are generally 
enforceable under sections 206(1) and 206(2) of the Advisers Act, 
which, in general terms, require the Applicant to: (i) Disclose 
material facts about the advisory relationship to its clients; (ii) 
treat each client fairly; and (iii) act only in the best interests of 
its client, disclosing conflicts of interest when present and obtaining 
client consent to arrangements that present such conflicts.
    7. The Applicant further notes that, in its capacity as a broker-
dealer with respect to these accounts, it will remain subject to a 
comprehensive set of Commission and FINRA regulations that apply to the 
relationship between a broker-dealer and its customer in addition to 
the fiduciary duties an adviser owes a client. These rules require, 
among other things, that the Applicant deal fairly with its customers, 
seek to obtain best execution of customer orders, and make only 
suitable recommendations. These obligations are designed to promote 
business conduct that protects customers from abusive practices that 
may not necessarily be fraudulent, and to protect against unfair prices 
and excessive commissions. Specifically, these provisions, among other 
things, require that the prices charged by the Applicant be reasonably 
related to the prevailing market, and limit the commissions and mark-
ups the Applicant can charge. Additionally, these obligations require 
that the Applicant have a reasonable basis to believe that a 
recommended transaction or investment strategy involving a security or 
securities is suitable for the customer, based on information obtained 
through reasonable diligence.
    8. The Applicant requests that the Commission issue an Order 
pursuant to section 206A exempting it from the written disclosure and 
consent requirements of section 206(3) only with respect to client 
accounts in the Program and any similar nondiscretionary program to be 
created in the future. The Applicant also requests that the 
Commission's Order

[[Page 88288]]

apply to future investment advisers controlling, controlled by, or 
under common control with the Applicant (``Future Advisers''). Any 
Future Adviser relying on any Order granted pursuant to the application 
will comply with the terms and conditions stated in the application.\1\
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    \1\ All entities that currently intend to rely on any order 
granted pursuant to the application are named as Applicants.
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Applicant's Conditions

    The Applicant agrees that any Order granting the requested relief 
will be subject to the following conditions:
    1. The Applicant will exercise no ``investment discretion'' (as 
such term is defined in section 3(a)(35) of the Exchange Act), except 
investment discretion granted by the advisory client on a temporary or 
limited basis,\2\ with respect to the client's account.
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    \2\ Discretion is considered to be temporary or limited for 
purposes of this condition when the investment adviser is given 
discretion: (i) As to the price at which or the time to execute an 
order given by a client for the purchase or sale of a definite 
amount or quantity of a specified security; (ii) on an isolated or 
infrequent basis, to purchase or sell a security or type of security 
when a client is unavailable for a limited period of time not to 
exceed a few months; (iii) as to cash management, such as to 
exchange a position in a money market fund for another money market 
fund or cash equivalent; (iv) to purchase or sell securities to 
satisfy margin requirements; (v) to sell specific bonds and purchase 
similar bonds in order to permit a client to take a tax loss on the 
original position; (vi) to purchase a bond with a specified credit 
rating and maturity; and (vii) to purchase or sell a security or 
type of security limited by specific parameters established by the 
client. See, e.g., Temporary Rule Regarding Principal Trades with 
Certain Advisory Clients, Investment Advisers Act Release No. 2653 
(Sept. 24, 2007) at n. 31.
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    2. The Applicant will not trade in reliance on this Order any 
security for which the Applicant or any person controlling, controlled 
by, or under common control with the Applicant is the issuer, or, at 
the time of the sale, an underwriter (as defined in section 202(a)(20) 
of the Advisers Act).
    3. The Applicant will not directly or indirectly require the client 
to consent to principal trading as a condition to opening or 
maintaining an account with the Applicant.
    4. The advisory client has executed a written revocable consent 
prospectively authorizing the Applicant directly or indirectly to act 
as principal for its own account in selling any security to or 
purchasing any security from the advisory client. The advisory client's 
written consent must be obtained through a signature or other positive 
manifestation of consent that is separate from or in addition to the 
signature indicating the client's consent to the advisory agreement. 
The separate or additional signature line or alternative means of 
expressing consent must be preceded immediately by prominent, plain 
English disclosure containing either: (a) An explanation of: (i) The 
circumstances under which the Applicant directly or indirectly may 
engage in principal transactions; (ii) the nature and significance of 
conflicts with its client's interests as a result of the transactions; 
and (iii) how the Applicant addresses those conflicts; or (b) a 
statement explaining that the client is consenting to principal 
transactions, followed by a cross-reference to a specific document 
provided to the client containing the disclosure in (a)(i)-(iii) above 
and to the specific page or pages on which such disclosure is located; 
provided, however, that if the Applicant requires time to modify its 
electronic systems to provide the specific page cross-reference 
required by clause (b), the Applicant may, while updating such 
electronic systems, and for no more than 90 days from the date of the 
Order, instead provide a cross-reference to a specific document 
provided to the client containing the disclosure in (a)(i)-(iii) above 
and to the specific section in such document in which such disclosure 
is located. Transition provision: To the extent that the Applicant 
obtained fully informed written revocable consent from an advisory 
client for purposes of rule 206(3)-3T(a)(3) prior to the date of this 
Order, the Applicant may rely on this Order with respect to such client 
without obtaining additional prospective consent from such client.
    5. The Applicant, prior to the execution of each transaction in 
reliance on this Order, will: (a) Inform the advisory client, orally or 
in writing, of the capacity in which it may act with respect to such 
transaction; and (b) obtain consent from the advisory client, orally or 
in writing, to act as principal for its own account with respect to 
such transaction.
    6. The Applicant will send a written confirmation at or before 
completion of each such transaction that includes, in addition to the 
information required by rule 10b-10 under the Exchange Act, a 
conspicuous, plain English statement informing the advisory client that 
the Applicant: (a) Disclosed to the client prior to the execution of 
the transaction that the Applicant may be acting in a principal 
capacity in connection with the transaction and the client authorized 
the transaction; and (b) sold the security to, or bought the security 
from, the client for its own account.
    7. The Applicant will send to the client, no less frequently than 
annually, written disclosure containing a list of all transactions that 
were executed in the client's account in reliance upon this Order, and 
the date and price of each such transaction.
    8. The Applicant is a broker-dealer registered under section 15 of 
the Exchange Act and each account for which the Applicant relies on 
this Order is a brokerage account subject to the Exchange Act, and the 
rules thereunder, and the rules of the self-regulatory organization(s) 
of which it is a member.
    9. Each written disclosure required as a condition to this Order 
will include a conspicuous, plain English statement that the client may 
revoke the written consent referred to in Condition 4 above without 
penalty at any time by written notice to the Applicant in accordance 
with reasonable procedures established by the Applicant, but in all 
cases such revocation must be given effect within 5 business days of 
the Applicant's receipt thereof.
    10. The Applicant will maintain records sufficient to enable 
verification of compliance with the conditions of this Order. Such 
records will include, without limitation: (a) Documentation sufficient 
to demonstrate compliance with each disclosure and consent requirement 
under this Order; (b) in particular, documentation sufficient to 
demonstrate that, prior to the execution of each transaction in 
reliance on this Order, the Applicant informed the advisory client of 
the capacity in which it may act with respect to the transaction and 
that it received the advisory client's consent (if the Applicant 
informs the client orally of the capacity in which it may act with 
respect to such transaction or obtains oral consent, such records may, 
for example, include recordings of telephone conversations or 
contemporaneous written notations); and (c) documentation sufficient to 
enable assessment of compliance by the Applicant with sections 206(1) 
and (2) of the Advisers Act in connection with its reliance on this 
Order.\3\ In each case, such records will be maintained and preserved 
in an easily accessible place for a period of not less than five years, 
the first two years in an appropriate office of the Applicant, and be 
available for inspection by the staff of the Commission.
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    \3\ For example, under sections 206(1) and (2), an adviser may 
not engage in any transaction on a principal basis with a client 
that is not consistent with the best interests of the client or that 
subrogates the client's interests to the adviser's own. Cf. 
Investment Advisers Act Release No. 2106 (Jan. 31, 2003) (adopting 
Rule 206(4)-6).
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    11. The Applicant will adopt written compliance policies and 
procedures reasonably designed to ensure, and the Applicant's chief 
compliance officer will monitor, the Applicant's

[[Page 88289]]

compliance with the conditions of this Order. The Applicant's chief 
compliance officer will, on at least a quarterly basis, conduct testing 
reasonably sufficient to verify such compliance. Such written policies 
and procedures, monitoring and testing will address, without 
limitation: (a) Compliance by the Applicant with its disclosure and 
consent requirements under this Order; (b) the integrity and operation 
of electronic systems employed by the Applicant in connection with its 
reliance on this Order; (c) compliance by the Applicant with its 
recordkeeping obligations under this Order; and (d) whether there is 
any evidence of the Applicant engaging in ``dumping'' in connection 
with its reliance on this Order.\4\ The Applicant's chief compliance 
officer will document the frequency and results of such monitoring and 
testing, and the Applicant will maintain and preserve such 
documentation in an easily accessible place for a period of not less 
than five years, the first two years in an appropriate office of the 
Applicant, and be available for inspection by the staff of the 
Commission.
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    \4\ See Report of the Securities and Exchange Commission, 
Investment Trusts and Investment Companies, H.R. Doc. No. 279, 76th 
Cong., 2d Sess., pt. 3, at 2581, 2589 (1939); Hearings on S.3580 
Before a Subcommittee of the Commission on Banking and Currency, 
76th Cong., 3d Sess. 209, 212-23 (1940); Hearings on S. 3580 Before 
the Subcomm. of the Comm. on Banking and Currency, 76th Cong., 3d 
Sess. 322 (1940).

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2016-29299 Filed 12-6-16; 8:45 am]
 BILLING CODE 8011-01-P