Document ID: SEC-2018-0222-0001
Agency: sec
Document Type: Notice
Title: Exemption Applications: Janney Montgomery Scott, LLC
Posted Date: 2018-02-05T05:00Z

[Federal Register Volume 83, Number 24 (Monday, February 5, 2018)]
[Notices]
[Pages 5148-5151]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-02168]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Advisers Act Release No. 4850; File No. 803-00243]

Janney Montgomery Scott LLC; Notice of Application

January 30, 2018.
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:  Janney Montgomery Scott LLC (``Applicant'').

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

Summary of Application:  The 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, 2017.

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 the 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 February 26, 2018, and should be accompanied 
by proof of service on the 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, c/o Laura E. Flores 
and Monica L. Parry, Morgan, Lewis & Bockius LLP, 1111 Pennsylvania 
Ave. NW, Washington, DC 20004.

FOR FURTHER INFORMATION CONTACT:  Laura L. Solomon, Senior Counsel, at 
(202) 551-6915, or Robert Shapiro, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Chief Counsel's Office).

SUPPLEMENTARY INFORMATION:  The following is a summary of the 
application. The complete application may be obtained via the 
Commission's website at http://www.sec.gov/rules/iareleases.shtml or by 
calling (202) 551-8090.
    The Applicant seeks relief from the written disclosure and consent

[[Page 5149]]

requirements of section 206(3) of the Advisers Act that would be 
similar to relief provided by Advisers Act rule 206(3)-3T (the 
``Rule''), which expired by its terms on December 31, 2016. The relief 
sought by the 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 offers the 
Partners Advisory Program (the ``Program''), a nondiscretionary 
advisory program.
    2. The Applicant established the Program in 1999. Prior to December 
31, 2016, the Applicant relied on the Rule to engage in principal 
transactions with its clients in the Program.
    3. As of December 31, 2016, the Applicant had a total of 23,428 
client accounts enrolled in the Program with aggregate assets of 
$7,318,704,000. On the same date, 1,491 client accounts had consented 
to principal transactions in their Program accounts in reliance on the 
Rule. In 2016, 4,527 trades were effected in reliance on the Rule in 
the Program. Approximately 90 percent of the trades done in reliance on 
the Rule in this period were purchases by client accounts; the average 
purchase was approximately $29,228. Approximately 10 percent of the 
trades done in reliance on the Rule in this period were sales from 
client accounts; the average sale was approximately $30,011.
    4. 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 
Financial Industry Regulatory Authority (``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. The Rule 
deemed 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, sold to or 
purchased from an advisory client any security, provided that the 
investment adviser complied with the conditions of the Rule.
    2. The Rule required, 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 was required to be obtained after the 
adviser provided 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 was required to 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 was available only to an investment adviser that was also a 
broker-dealer registered under section 15 of the Securities Exchange 
Act of 1934 (``Exchange Act'') and could only be relied upon with 
respect to a nondiscretionary account that was 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. The Rule 
was not available for principal transactions if the investment adviser 
or a person who controlled, was controlled by, or was under common 
control with the adviser (``control person'') was the issuer or an 
underwriter of the security (except that an investment adviser could 
rely on the Rule for trades in which the investment adviser or a 
control person was an underwriter of non-convertible investment-grade 
debt securities).
    3. The Rule also required the investment adviser to provide to the 
client a trade confirmation that, in addition to the requirements of 
rule 10b-10 under the Exchange Act, included 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 was required to 
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. The Rule expired on December 31, 2016. Absent the requested 
relief, 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 have had access to the Applicant's inventory through principal 
transactions with the Applicant 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), the 
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 was able to provide to its 
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

[[Page 5150]]

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 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 January 1, 2017, 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

[[Page 5151]]

of each transaction in reliance on this Order, the Applicant informed 
the relevant advisory client of the capacity in which the Applicant 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 investment 
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 interests of 
the investment adviser. 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 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).

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-02168 Filed 2-2-18; 8:45 am]
 BILLING CODE 8011-01-P