[Federal Register Volume 59, Number 80 (Tuesday, April 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9890]
[[Page Unknown]]
[Federal Register: April 26, 1994]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-1411; S7-2-94]
RIN 3235-AG02
Disclosure by Investment Advisers Regarding Wrap Fee Programs
AGENCY: Securities and Exchange Commission.
ACTION: Final rule and form amendments.
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SUMMARY: The Commission is adopting rule and form amendments under the
Investment Advisers Act of 1940 relating to ``wrap fee'' programs. The
amendments specify the information that registered investment advisers
that are sponsors of wrap fee programs must provide to prospective
clients in these programs. The amendments are intended to provide
prospective wrap fee program clients with important information
regarding the cost of the programs and the services provided.
EFFECTIVE DATE: October 1, 1994.
FOR FURTHER INFORMATION CONTACT: Eric C. Freed, Senior Attorney, (202)
942-0726, or Robert E. Plaze, Assistant Director, (202) 942-0721,
Office of Disclosure and Investment Adviser Regulation, Division of
Investment Management, 450 Fifth Street NW., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission
(``Commission'') today is adopting amendments to:
(1) Form ADV [17 CFR 279.1] under the Investment Advisers Act of
1940 [15 U.S.C. 80b-1 et seq.] (the ``Advisers Act'') to require
advisers that sponsor wrap fee programs (``sponsors'') to file with the
Commission as part of Form ADV a document (the ``wrap fee brochure'')
containing certain disclosures about the sponsor and its wrap fee
programs in a narrative (rather than check-the-box) format;
(2) Rule 204-3 under the Advisers Act [17 CFR 275.204-3] to require
sponsors to deliver the wrap fee brochure to current and prospective
wrap fee program clients in lieu of the disclosure document they are
required to deliver to other clients and prospective clients; and
(3) Rule 204-1 under the Advisers Act [17 CFR 275.204-1] setting
forth the requirements for updating the wrap fee brochure.
I. Discussion
On January 13, 1994, the Commission issued a release proposing
amendments to Form ADV and related rules under the Advisers Act
(``Proposing Release'') to improve the quality of brochure disclosure
that clients of wrap fee programs receive.\1\ A wrap fee program
provides an investor with two types of services: investment advisory
services and execution services for a single ``wrap'' fee, usually a
percentage of assets under management. Among the advisory services
typically provided are asset allocation, portfolio management, and
monitoring of the portfolio management services.\2\ Other ancillary
services, such as custody of client funds and securities and client
reporting, are also provided. The Commission proposed that the sponsor
of a wrap fee program provide the wrap fee brochure to prospective
clients of the program in lieu of the brochure the sponsor currently is
required to provide to other advisory clients.\3\ The Commission also
proposed requirements for disclosure to be included in the wrap fee
brochure. The Commission received thirty comment letters in response to
the proposed amendments.\4\
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\1\Investment Advisers Act Rel. No. 1401 (Jan. 13, 1994) [59 FR
3033 (Jan. 20, 1994)].
\2\See Proposing Release, supra note 1, at Sec. I.
\3\An adviser has the option to deliver to prospective advisory
clients a copy of Part II of Form ADV, which consists primarily of a
series of questions relating to the adviser's investment advisory
services answered by checking the appropriate boxes, or a narrative
brochure containing, at a minimum, the information required by Part
II, Paragraph (a) of rule 204-3 [17 CFR 275.204-3(a)].
\4\The comment letters, as well as a comment summary prepared by
the Commission's staff, are available for public inspection and
copying at the Commission's Public Reference Room in File No. S7-2-
94.
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The Commission is adopting the proposed amendments with some
modifications to reflect comments received. The modifications generally
relate to the scope of the obligation to deliver the wrap fee brochure
(i.e., the definitions of ``wrap fee program'' and ``sponsor'') and the
disclosure requirements of the brochure.5
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\5\Form ADV is a joint federal-state form used to register as an
adviser with the Commission and with all states that require adviser
registration. The amendments were prepared in cooperation with the
North American Securities Administrators Association, Inc., which
has voted to amend its Uniform Rules under the Uniform Securities
Act to adopt the wrap fee brochure requirements discussed in this
Release.
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A. Applicability of Disclosure Requirements
The Commission proposed to require that the wrap fee brochure be
provided by ``sponsors'' of ``wrap fee programs.'' The Commission
received several comments concerning the scope of these terms. The
amendments, as adopted, contain modifications to reflect certain of
these comments.
1. Wrap Fee Programs
Under the proposal, a ``wrap fee program'' was defined, in part, as
a program under which any client is charged for investment advisory and
execution services a specified fee or fees not based directly upon the
transactions in the client's account. Some commenters asserted that
programs under which clients are charged a wrap fee for portfolio
management and execution of transactions, but under which no advice
about portfolio managers is provided, should be excluded from the
definition of wrap fee program because of the absence of advice about
portfolio managers.6 The wrap fee brochure is intended to address
the special disclosure needs of clients participating in programs that
offer investment advice and brokerage for a single fee, regardless of
whether advice about portfolio managers is provided.7 Therefore,
as adopted, the definition of wrap fee program includes programs under
which no advice regarding portfolio managers is provided.8
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\6\Under many of these programs, only a single portfolio
manager, usually the broker itself or its affiliate, is available to
clients.
\7\The only disclosure requirement that necessarily will not be
applicable to programs not contemplating the selection of a
portfolio manager is Item 7(f) of Schedule H, regarding how the
sponsor selects and recommends portfolio managers.
\8\The definition includes only wrap fee arrangements that are
part of wrap fee ``programs,'' a term intended to describe
arrangements that have some degree of uniformity among clients and
that are entered into more than occasionally. Thus, an adviser that
occasionally enters into wrap fee arrangements with clients and does
not promote or solicit clients for wrap fee arrangements is not a
sponsor of a ``program'' under the amendments.
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a. Managed Account Programs. In the Proposing Release, the
Commission requested comment whether ``managed account programs,''
under which clients are provided with advice about portfolio managers
but are charged advisory fees together with transaction-based
commissions (rather than a single fee), should be included in the
definition of wrap fee program. Commenters generally were opposed to
the inclusion of managed account programs in the definition. Because
managed account programs do not involve advisory and brokerage services
provided for a single fee and thus do not raise the types of disclosure
concerns addressed in the amendments, the Commission has not included
these programs within the definition.9
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\9\As noted in the Proposing Release, the definition of wrap fee
program includes programs under which clients are offered a choice
between a wrap fee and a fee-plus-commission arrangement. Proposing
Release, supra note 1, at n.9. The sponsor of a program offering a
choice of fee arrangements must provide prospective clients of the
program with the wrap fee brochure describing each alternative.
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b. Mutual Fund Asset Allocation Programs. The proposed amendments
would have included as wrap fee programs arrangements under which
advice is provided regarding the allocation of client assets among
mutual funds affiliated with the sponsor. Many commenters argued that
mutual fund asset allocation programs should be excluded from the
definition because they are more similar to traditional advisory
services than to wrap fee programs, and the disclosure concerns they
raise are addressed under current Part II of Form ADV (``Part II'').
The Commission believes that mutual fund asset allocation programs,
because they do not involve the provision of advisory and brokerage
services for a single wrap fee, generally do not raise the disclosure
concerns addressed in the amendments, and has modified the definition
of wrap fee program to exclude mutual fund asset allocation programs.
The Commission may consider in connection with future revisions to Form
ADV whether additional disclosure requirements regarding these programs
are needed.
2. Sponsors
The proposed amendments defined the term ``sponsor'' broadly to
include an adviser that sponsors or organizes a wrap fee program or
that provides advice to clients regarding the selection of portfolio
managers in the program.\10\ The Commission recognized that such a
broad definition might result in a single program's having more than
one sponsor, and therefore proposed to permit the sponsors to choose
among themselves the sponsor that would deliver the wrap fee brochure
to clients.\11\ Some comments suggested that the definition of sponsor
unintentionally included advisers who recommend wrap fee program
portfolio managers to clients, but who are not involved with or
compensated under the wrap fee program. In addition, commenters
suggested that the definition of ``sponsor'' be made consistent with
the North American Securities Administrators Association's proposed
amendments to their Uniform Rules under the Uniform Securities Act.\12\
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\10\The sponsor of a wrap fee program is generally required to
register as an adviser under the Advisers Act. See National
Regulatory Services, Inc. (pub. avail. Dec. 2, 1992).
\11\As adopted, amended rule 204-3 permits the sponsors of a
wrap fee program to allocate brochure obligations. The rule does
not, however, relieve a sponsor from liability for violating the
rule if another sponsor fails to deliver the brochure.
\12\Uniform Rule 203(b)-2, NASAA Reports (CCH) 4104 (Oct.
1993).
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Based on these comments, the Commission is revising the definition
of sponsor to include only those advisers that ``are compensated under
a wrap fee program for sponsoring, organizing, or administering the
program, or for selecting, or providing advice to clients regarding the
selection of, other investment advisers in the program.''\13\ A
registered adviser that has an advisory relationship or prospective
advisory relationship with a wrap fee client, but is not compensated
under the wrap fee program, is not a sponsor and must provide the
client with the brochure that the adviser is otherwise required to
provide its clients pursuant to rule 204-3 under Advisers Act (the
``general brochure'').\14\ A sponsor of a wrap fee program that is a
registered investment adviser must deliver the wrap fee brochure
(unless another sponsor has assumed that obligation) to a prospective
client of the program even if that sponsor will not have an advisory
relationship with the prospective client (because, for example, that
sponsor provides only administrative services under the program).\15\
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\13\New paragraph (f)(1) of rule 204-3; Instruction 1 of
Schedule H. A person that is paid to solicit clients for a wrap fee
program is not a sponsor of the program merely because of the
solicitation activities. A person that is paid to solicit clients
for a program, but that does not provide any services under the
program, generally will be subject to rule 206(4)-3 under the
Advisers Act [17 CFR 275.206(4)-3].
\14\Paragraph (a) of rule 204-3. A firm that provides services
enumerated in the definition of sponsor, but that is not a
registered investment adviser (e.g., a bank), is not required to
provide any brochure. Paragraph (f)(1) of rule 204-3.
\15\As adopted, paragraph (f) of rule 204-3 requires advisers
that are registered or required to be registered to deliver a
brochure to prospective clients ``of the wrap fee program.'' Compare
paragraph (a) of rule 204-3. This provision is intended to increase
the likelihood that at least one registered investment adviser is
obligated to provide the wrap fee brochure to a client participating
in a wrap fee program.
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B. The Separate Brochure
1. In General
As noted above, the Commission proposed a narrative wrap fee
brochure that would be separate from, and would be provided to wrap fee
clients in lieu of, the sponsor's general brochure. Commenters
generally supported requiring a narrative disclosure document in
connection with wrap fee programs. Commenters were divided, however,
over whether a separate wrap fee brochure should be required. Nine
commenters supported requiring a separate brochure, six of whom
asserted that a separate document should be required for each
program.\16\ Nine other commenters opposed the separate brochure
requirement, arguing that a brochure describing all of the sponsor's
advisory services would provide relevant information about the client's
investment alternatives.
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\16\The proposed amendments would give a sponsor the option of
using a single brochure for all of its wrap fee programs or creating
separate brochures for each program.
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The Commission has decided to retain a separate brochure
requirement.\17\ The Commission has observed that brochures containing
disclosure about wrap fee programs often also describe other programs
that are not available to most wrap fee clients because they do not
meet the minimum account or other eligibility requirements of those
other programs. Thus, these combined brochures may not in fact provide
information about available investment alternatives, as argued by
commenters opposing the separate brochure proposal. Moreover, brochures
describing multiple programs are often lengthy and cumbersome and may
discourage prospective clients from reading them.\18\
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\17\New paragraph (f)(1) of rule 204-3. As noted below, more
than one wrap fee program may be described in the same brochure. See
Section I.B.2 infra.
\18\For instance, the Commission staff found that one sponsor
delivered a fifty-nine page Part II (exclusive of financial
statements) to wrap fee program clients, while another delivered a
fifty-two page Part II. Some commenters suggested requiring a table
of contents in brochures as an alternative to a separate brochure. A
table of contents requirement would not serve as an effective
substitute for a separate brochure because all of the information
relevant to a wrap fee client typically is not located in one
section of the brochure.
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Commenters opposed to a separate brochure requirement also argued
that such a requirement would impose substantial additional costs on
sponsors. The Commission believes, however, that the cost burden of a
separate brochure requirement will be small in relation to its
benefits.\19\
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\19\See the Cost/Benefit Analysis in Section II of this Release
infra.
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The Commission does not expect that sponsors will need to deliver
both their general brochure and their wrap fee brochure to significant
numbers of prospective advisory clients. Many prospective wrap fee
program clients will likely not be interested in or eligible for other
programs. Furthermore, a client being offered a program with a choice
of fee arrangements need only be offered the wrap fee brochure.\20\
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\20\See note 9 supra.
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2. Multiple Wrap Fee Programs
The proposed amendments would give sponsors the option to prepare
either a single brochure describing all their wrap fee programs or
separate brochures describing different programs. The Proposing Release
requested comment whether separate brochures should be required for
each of a sponsor's wrap fee programs, or whether a single brochure
describing all programs should be required. Some commenters believed
that separate brochures for each program should be required, while
others believed that sponsors should have the flexibility to use either
separate or combined brochures.
The Commission is retaining the provision in the proposal giving
sponsors the option to prepare either a single brochure describing all
of their wrap fee programs or separate brochures for each program. A
sponsor that uses separate brochures for different wrap fee programs
must note the existence of the other programs in each brochure, and
state how brochures for the other programs can be obtained.\21\ This
disclosure will inform clients that alternative programs may be
available to them.
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\21\Item 5 of Schedule H.
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C. Contents of the Brochure
The requirements for the contents of the wrap fee brochure are set
forth in a new schedule to Form ADV, Schedule H.\22\ The requirements
of Schedule H are substantially similar to the requirements set forth
in the proposed amendments.
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\22\Wrap fee brochures must be filed with the Commission
attached to a completed Schedule H.
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The Commission urges sponsors to draft wrap fee brochures in a
direct and understandable manner. Consideration should be given, for
example, to the level of sophistication of clients and prospective
clients of the program. In addition, technical language should be
avoided, unless it is clearly explained or substantially all of the
program's clients and prospective clients possess the sophistication to
understand the disclosure without explanation.
1. Cover Page and Table of Contents
Schedule H requires that the cover page of the wrap fee brochure
include the sponsor's name, address, telephone number, and a legend
regarding the purpose of the brochure.\23\ These requirements are the
same as those of the proposed amendments. In addition, the amendments
require that the wrap fee brochure include a table of contents
reflecting the subject headings in the brochure. The table of contents
need not be on the cover page.\24\
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\23\Item 7(a) of Schedule H.
\24\Item 7(b) of Schedule H. The amendments do not require that
the information in the brochure be ordered or organized in any
particular manner, except with regard to the information required to
be on the cover page.
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2. Fee and Compensation Disclosure
The Commission is adopting as proposed those provisions of Schedule
H that require the wrap fee brochure to set forth the wrap fee, the
services provided for that fee, and whether the fee is negotiable.\25\
Schedule H also requires that the brochure describe the nature of any
fees the client may pay in addition to the wrap fee, state that the
program may cost the client more or less than the same services
purchased separately, and disclose the factors that bear upon the cost
of the program in relation to the cost of the same services purchased
separately.\26\ If fees vary according to a schedule (e.g., on the
basis of the amount of assets the client has in the program), the fee
schedule must be presented in a table.
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\25\Item 7(c) of Schedule H.
\26\The brochure is required only to explain the factors that
affect whether a wrap fee arrangement or a traditional fee-plus-
commission arrangement will be less costly to a client, and need not
provide actual or estimated costs for particular services outside
the wrap fee program.
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As adopted, Schedule H also retains the requirement of the proposal
that the portion of the wrap fee paid to portfolio managers (or the
range of those amounts) be disclosed in the wrap fee brochure.\27\ The
Proposing Release requested comment whether similar information should
be required regarding the compensation paid to registered
representatives of the sponsor in connection with wrap fee accounts,
and whether disclosure that registered representatives have a financial
incentive to recommend the wrap fee program over other services of the
sponsor should be required. Industry commenters were opposed to
requiring amounts of compensation to be disclosed, in part because the
amounts often vary substantially among representatives, but many
acknowledged the need for disclosure that representatives are
compensated.
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\27\Item 7(c) of Schedule H. Because of the inclusion of this
information in the sponsor's wrap fee brochure, the Division of
Investment Management would not object if the portfolio manager's
brochure omitted the portion of the wrap fee received by the manager
in response to Item 1 of Part II. See National Regulatory Services,
supra note 10.
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The method and amount of compensation of an adviser or its
representative may create a conflict of interest between the adviser
and its client and the representative and his client if incentives are
created for recommending a wrap fee program rather than, for example,
mutual funds or other advisory programs (including traditional fee-
plus-commission arrangements) that meet the needs of clients and that
may be less expensive. To alert investors to this conflict of interest,
Schedule H requires that, if persons recommending a wrap fee program
receive compensation as a result of client participation in the
program, the wrap fee brochure must disclose (1) that persons
recommending the program will be compensated, (2) that the amount of
this compensation may be more than the amount the person would receive
if the client participated in other programs of the sponsor or paid
separately for investment advice, brokerage and other services, and (3)
that the person may therefore have a financial incentive to recommend
the program over other programs or services.\28\
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\28\Item 7(e) of Schedule H. Because the amount a registered
representative will receive may not be readily determinable at the
time a client selects a program or service, Schedule H does not
require that the brochure state that the representative will receive
greater compensation in connection with the wrap fee program than
with alternative programs.
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3. Portfolio Manager Performance Information
The Commission proposed that the wrap fee brochure be required to
disclose if performance information provided to clients regarding
portfolio managers is not calculated on a uniform or consistent basis,
and to refer to any standards under which the information is
calculated.\29\ The Commission also proposed that the brochure disclose
whether performance information is reviewed by the sponsor or a third
party, and, if so, the identity of the reviewer.\30\ These requirements
are being adopted substantially as proposed.
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\29\Item 7(h) of Schedule H.
\30\Id.
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The Proposing Release requested comment whether sponsors should be
required to explain the extent of any review of portfolio manager
performance information. Most commenters addressing the issue favored
such disclosure, and the amendments require the wrap fee brochure to
describe briefly the nature of the review.\31\ This description should
include, among other matters, whether the review is designed to
determine whether the performance information reflects the actual
experience of accounts under management, the appropriateness of the
methodology used to calculate performance, compliance with any
standards the sponsor or portfolio manager has stated it will follow,
and/or whether the reviewer has merely reviewed the mathematical
accuracy of the calculations.\32\ If the scope of the review of the
performance information is limited to the mathematical accuracy of the
calculations, the brochure should describe that the reviewer has not
reviewed the information to determine the appropriateness of the
methodology used or whether the information reflects the actual
experience of accounts under management.
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\31\Id.
\32\The Proposing Release requested comment whether the
Commission should propose the use of standardized formulas for the
calculation of performance information of portfolio managers in wrap
fee programs, or of advisers generally. The Commission plans to
continue to study this issue.
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4. Other Disclosure Requirements
The other disclosure requirements of the proposed amendments are
being adopted largely as proposed. These requirements include how
portfolio managers in the program are selected,33 the information
about the client that is communicated to its portfolio manager,34
and restrictions placed on client contact with portfolio
managers.35 The general disclosure about the sponsor that is
required to be included in the wrap fee brochure by reference to
certain questions of Part II is also being adopted without modification
to the proposal.36
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\3\3Item 7(g) of Schedule H.
\3\4Item 7(i) of Schedule H.
\3\5Item 7(j) of Schedule H. One commenter requested that the
Commission clarify that the requirement to disclose restrictions on
client contact with portfolio managers does not indicate a change in
the Division of Investment Management's position that an adviser
managing accounts in a collective manner may be operating an
unregistered investment company. It does not.
\3\6Item 7(k) of Schedule H. Item 7(m) of Schedule H requires
that the wrap fee brochure discuss the nature of the portfolio
management services provided under the program by the sponsor's
employees or divisions covered under the same investment adviser
registration as the sponsor. Although the Schedule would not require
disclosure regarding the educational and business background of, and
the particular investment strategy used by, every registered
representative that serves as a portfolio manager in a wrap fee
program sponsored by the representative's employer, such information
may be material and may have to be provided to clients in some form.
See Proposing Release, supra note 1, at n.33.
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D. Delivery and Updating
The amendments require that the wrap fee brochure be delivered to
prospective wrap fee clients and annually offered to an adviser's
existing wrap fee clients.37 The Commission is also requiring that
the wrap fee brochure be delivered to all clients (including clients
who have received the sponsor's general brochure) on a one-time basis
when the brochure is first filed with the Commission, so that existing
clients of wrap fee programs receive the basic disclosure about the
program that will in the future be provided to prospective
clients.38
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\3\7These delivery requirements are the same as the requirements
in the proposed amendments and for the general brochure. Paragraphs
(b) and (c) of rule 204-3 [17 CFR 275.204-3 (b) and (c)]. The
delivery to prospective clients must occur not less than forty-eight
hours before the client enters into an advisory contract or, if the
contract may be terminated by the client without penalty within five
business days of its execution, at the time of entering into the
contract. Paragraph (b)(1) of rule 204-3 [17 CFR 275.204-3(b)(1)].
\3\8New paragraph (f)(4) of rule 204-3. See the effectiveness
provisions in Section I.E of this Release infra.
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The wrap fee brochure is required to be updated promptly to reflect
material changes to the information it contains, or within ninety days
after the end of the sponsor's fiscal year to reflect other
changes.39 The wrap fee brochure may be updated by the use of a
sticker (i.e., a supplement affixed to the brochure that indicates what
information is being added or updated and states the new or revised
information). The proposed amendments would have limited sponsors to
two consecutive stickers before all changes would have had to be
incorporated into the brochure itself. As some commenters suggested,
the Commission is not adopting a numerical limit on stickers; instead,
updating by sticker will be permitted so long as the resulting brochure
remains readable.40
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\3\9Paragraph (b) of rule 204-1, as amended.
\4\0Item 6 of Schedule H. The Commission would consider a
brochure subject to multiple stickers or a single sticker amending
multiple provisions to be unreadable if the brochure has become
particularly unwieldy or difficult to follow as a result of the
stickers or sticker.
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E. Date of Effectiveness
A sponsor is required to file an amendment to Form ADV to include
the necessary wrap fee brochure or brochures, to deliver the wrap fee
brochure to existing wrap fee clients,41 and to begin to deliver
the wrap fee brochure to prospective wrap fee clients, by October 1,
1994, approximately five months after the adoption of the
amendments.42
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\4\1See Section I.D supra.
\4\2The Proposing Release requested comment whether a 120-day
transition period would be appropriate. A few commenters stated that
a 180-day transition period would be more appropriate.
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II. Cost/Benefit Analysis
Several commenters raised concerns that the form and rule
amendments as proposed, particularly the requirement for a separate
wrap fee brochure, could result in additional costs for sponsors that
may be passed on to investors. The Commission has modified the
amendments in part because of these concerns, but continues to believe
that the cost of a separate wrap fee brochure is outweighed by the
benefit to investors of improved disclosure about wrap fee programs.
The Commission has narrowed the scope of the terms ``wrap fee
program'' and ``sponsor.'' As a result, certain advisers that would
have incurred the costs of the wrap fee brochure under the proposed
amendments will not incur any costs as a result of the amendments, and
other advisers will incur reduced costs because fewer of their programs
are subject to the amendments. The Commission has also liberalized the
use of stickers, which should reduce the cost of updating the brochure.
The Commission does not believe that the cost of a separate wrap
fee brochure need be substantial. The brochure need not be
professionally printed, and professionally printed brochures generally
can be updated by sticker, rendering frequent reprinting
unnecessary.43
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\4\3One commenter suggested that sponsors would find
professional printing necessary for marketing purposes. Many
sponsors, however, currently deliver Part II, rather than a printed
document, to clients as their brochure. Many sponsors that use Part
II presumably would deliver a typewritten wrap fee brochure to wrap
fee clients.
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III. Regulatory Flexibility Act Analysis
A summary of the Initial Regulatory Flexibility Analysis, which was
prepared in accordance with 5 U.S.C. 603, was published in Investment
Advisers Act Rel. No. 1401. No comments were received on this analysis.
The Commission has prepared a Final Regulatory Flexibility Analysis, a
copy of which may be obtained by contacting Eric C. Freed, Office of
Disclosure and Investment Adviser Regulation, Division of Investment
Management, 450 Fifth Street, NW., Washington, DC 20549.
IV. Text of Rule and Form Amendments
List of Subjects in 17 CFR Parts 275 and 279
Investment advisers, Reporting and recordkeeping requirements.
For the reasons set out in the preamble, the Commission is amending
chapter II, title 17 of the Code of Federal Regulations as follows.
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
1. The general authority citation for Part 275 is revised to read
as follows:
Authority: 15 U.S.C. 80b-3, 80b-4, 80b-6A, 80b-11, unless
otherwise noted.
* * * * *
2. By revising paragraph (b)(1) of Sec. 275.204-1 to read as
follows:
Sec. 275.204-1 Amendments to application for registration.
* * * * *
(b)(1) If the information contained in response to Items 1, 2, 3,
4, 5, 8, 11, 13A, 13B, 14A and 14B of Part I of any application for
registration as an investment adviser, or in any amendment thereto,
becomes inaccurate for any reason or if the information contained in
response to any question in Items 9 and 10 of Part I, all of Part II
(except Item 14), and all of Schedule H of any application for
registration as an investment adviser, or in any amendment thereto,
becomes inaccurate in a material manner, the investment adviser shall
promptly file an amendment on Form ADV (Sec. 279.1 of this chapter)
correcting such information.
* * * * *
3. By amending Sec. 275.204-3 by redesignating paragraph (f) as
paragraph (g), and by adding paragraphs (f) and (g)(4) to read as
follows:
Sec. 275.204-3 Written disclosure statements.
* * * * *
(f) Sponsors of Wrap Fee Programs.--(1) An investment adviser,
registered or required to be registered pursuant to Section 203 of the
Act, that is compensated under a wrap fee program for sponsoring,
organizing, or administering the program, or for selecting, or
providing advice to clients regarding the selection of, other
investment advisers in the program, shall, in lieu of the written
disclosure statement required by paragraph (a) of this section and in
accordance with the other provisions of this section, furnish each
client and prospective client of the wrap fee program with a written
disclosure statement containing at least the information required by
Schedule H of Form ADV (Sec. 279.1 of this Chapter). Any additional
information included in such disclosure statement should be limited to
information concerning wrap fee programs sponsored by the investment
adviser.
(2) If an investment adviser is required under this paragraph (f)
to furnish disclosure statements to clients or prospective clients of
more than one wrap fee program, the investment adviser may omit from
the disclosure statement furnished to clients and prospective clients
of a wrap fee program or programs any information required by Schedule
H that is not applicable to clients or prospective clients of that wrap
fee program or programs.
(3) An investment adviser need not furnish the written disclosure
statement required by paragraph (f)(1) of this section to clients and
prospective clients of a wrap fee program if another investment adviser
is required to furnish and does furnish the written disclosure
statement to all clients and prospective clients of the wrap fee
program.
(4) An investment adviser that is required under this paragraph (f)
to furnish a disclosure statement to clients of a wrap fee program
shall furnish the disclosure statement to each client of the wrap fee
program (including clients that have previously been furnished the
brochure required under paragraph (a) of this section) no later than
October 1, 1994.
(g) Definitions. * * *
(4) Wrap fee program means a program under which any client is
charged a specified fee or fees not based directly upon transactions in
a client's account for investment advisory services (which may include
portfolio management or advice concerning the selection of other
investment advisers) and execution of client transactions.
PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940
4. The authority citation for Part 279 continues to read as
follows:
Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-1,
et seq.
Note: The text of Form ADV does not and the amendments will not
appear in the Code of Federal Regulations.
5. By revising Instructions 2, 6 and 7 of Form ADV (referenced in
Sec. 279.1), and by adding Instruction 9 to read as follows:
Form ADV Instructions
* * * * *
2. Organization
The Form contains two parts. Parts I and II are filed with the SEC
and the jurisdictions; Part II can generally be given to clients to
satisfy the brochure rule. The Form also contains the following
schedules:
Schedule A--for corporations;
Schedule B--for partnerships;
Schedule C--for entities that are not sole
proprietorships, partnerships or corporations;
Schedule D--for reporting information about individuals
under Part I Item 12;
Schedule E--for continuing responses to Part I items;
Schedule F--for continuing responses to Part II items;
Schedule G--for the balance sheet required by Part II Item
14; and
Schedule H--for satisfaction of the brochure rule by
sponsors of wrap fee programs.
* * * * *
6. Continuation Sheets--Schedules E and F provide additional space
for continuing Form ADV items (Schedule E for Part I; Schedule F for
Part II) but not for continuing Schedules A, B, C, D, G or H. To
continue Schedules A, B, C, D and G, use copies of the schedule being
continued. The response to Schedule H should be included as a separate
document attached to the Schedule.
7. SEC Filings
Submit filings in triplicate to the Securities and
Exchange Commission, Washington, DC 20549. To register, submit a check
or money order for $150 payable to the Securities and Exchange
Commission. This fee is non-refundable. There is no fee for amendments.
Non-Residents--Rule 0-2 under the Investment Advisers Act
of 1940 [17 CFR 275.0-2] covers those non-resident persons named
anywhere in Form ADV that must file a consent to service of process and
a power of attorney. Rule 204-2(j) under the Investment Advisers Act of
1940 [17 CFR 275.204-2] covers the notice of undertaking on books and
records non-residents must file with Form ADV.
Updating. Federal law requires filing amendments:
--promptly for any changes in:
Part I--Items 1, 2, 3, 4, 5, 8, 11, 13A, 13B, 14A, and 14B;
--promptly for material changes in:
Part I--Items 9 and 10, all Items of Part II except Item 14, and
all Items of Schedule H;
--within 90 days of the end of the fiscal year for any other changes.
Federal Information Law and Requirements--Investment
Advisers Act of 1940 Sections 203(c), 204, 206, and 211(a) authorize
the SEC to collect the information on this Form from applicants for
investment adviser registration. The information is used for regulatory
purposes, including deciding whether to grant registration. The SEC
maintains files of the information on this form and makes it publicly
available. Only the Social Security Number, which aids identifying the
applicant, is voluntary. The SEC may return as unacceptable Forms that
do not include all other information. By accepting this Form, however,
the SEC does not make a finding that it has been filled out or
submitted correctly. Intentional misstatements or omissions constitute
Federal criminal violations under 18 U.S.C. 1001 and 15 U.S.C. 80b-17.
* * * * *
9. Sponsors of Wrap Fee Programs--Sponsors of wrap fee programs
must provide clients and prospective clients of wrap fee programs with
a document containing the information required by Schedule H.
Wrap Fee Programs--A wrap fee program is any program under
which any client is charged a specified fee or fees not based directly
upon transactions in a client's account for investment advisory
services (which may include portfolio management or advice concerning
the selection of other investment advisers) and execution of client
transactions.
Sponsors--A sponsor of a wrap fee program is any applicant
that is compensated under a wrap fee program for sponsoring,
organizing, or administering the program, or for selecting, or
providing advice to clients regarding the selection of, other
investment advisers in the program.
The document prepared in response to Schedule H must be provided to
clients of the wrap fee program in lieu of Part II (or the document
containing the information required by Part II), which the sponsor is
required to provide to other advisory clients. Part II and Schedule F
need only contain an abbreviated narrative discussion of a sponsor's
wrap fee programs, although responses to check-the-box questions in
Part I and Part II should reflect the applicant's wrap fee programs.
* * * * *
6. By revising Item 16 of Part I of Form ADV (referenced in
Sec. 279.1) to read as follows:
Form ADV
Part I
* * * * *
16. With a few exceptions, the ``brochure rule'' (Advisers Act Rule
204-3) requires that clients must be given information about the
investment adviser. Will applicant be giving clients (other than wrap
fee clients to be given Schedule H):
Yes No
A. Part II of this Form ADV?.............................. ____ ____
B. Another document that includes at least the information ____ ____
contained in Form ADV Part II?.
* * * * *
7. By adding Schedule H to Form ADV (referenced in Sec. 279.1) to
read as follows:
Note: Schedule H to Form ADV is attached as Appendix 1 to this
document and the Schedule will not appear in the Code of Federal
Regulations.
By the Commission.
April 19, 1994.
Margaret H. McFarland,
Deputy Secretary.
Appendix 1
Schedule H of Form ADV
Applicant:
SEC File No.: 801-
Date: MM/DD/YY
(for sponsors of wrap fee programs)
Name of wrap fee program or programs described in attached
brochure:
1. Applicability of Schedule. This Schedule must be completed by
applicants that are compensated under a wrap fee program for
sponsoring, organizing, or administering the program, or for
selecting, or providing advice to clients regarding the selection
of, other investment advisers in the program (``sponsors''). A wrap
fee program is any program under which a specified fee or fees not
based directly upon transactions in a client's account is charged
for investment advisory services (which may include portfolio
management or advice concerning the selection of other investment
advisers) and execution of client transactions.
2. Use of Schedule. This Schedule sets forth the information the
sponsor must include in the wrap fee brochure it is required to
deliver or offer to deliver to clients and prospective clients of
its wrap fee programs under Rule 204-3 under the federal Advisers
Act and similar rules of the jurisdictions. The wrap fee brochure
prepared in response to this Schedule must be filed with the
Commission and the jurisdictions as part of Form ADV by completing
the identifying information on this Schedule and attaching the
brochure. Brochures should be prepared separately, not on copies of
this Schedule. Any wrap fee brochure filed with the Commission as
part of an amendment to Form ADV shall contain in the upper right
hand corner of the cover page the sposor's registration
number (801- ).
3. General Contents of Brochure. Unlike Parts I and II of this
form, this Schedule is not organized in ``check-the-box'' format.
These Instructions, including the requests for information in Item 7
below, should not be repeated in the brochure. Rather, this Schedule
describes minimum disclosures that must be made in the brochure to
satisfy the sponsor's duty to disclose all material facts about the
sponsor and its wrap fee programs. Nothing in this Schedule relieves
the sponsor from any obligation under any provision of the federal
Advisers Act or rules thereunder, or other federal or state law to
disclose information to its advisory clients or prospective advisory
clients not specifically required by this Schedule.
4. Multiple Sponsors. If two or more persons fall within the
definition of ``sponsor'' in Item 1 above for a single wrap fee
program, only one such sponsor need complete the Schedule. The
sponsors may choose among themselves the sponsor that will complete
the Schedule.
5. Omission of Inapplicable Information. Any information not
specifically required by this Schedule that is included in the
brochure should be applicable to clients and prospective clients of
the sponsor's wrap fee programs. If the sponsor is required to
complete this Schedule with respect to more than one wrap fee
program, the sponsor may omit from the brochure furnished to clients
and prospective clients of any wrap fee program or programs
information required by this Schedule that is not applicable to
clients or prospective clients of that wrap fee program or programs.
If a sponsor of more than one wrap fee program prepares separate
wrap fee brochures for clients of different programs, each brochure
prepared must be filed with the Commission and the jurisdictions
attached to a separate copy of this Schedule. Each such brochure
must state that the sponsor sponsors other wrap fee programs and
state how brochures for those programs may be obtained.
6. Updating. Sponsors are required to file an amendment to the
brochure promptly after any information in the brochure becomes
materially inaccurate. Amendments may be made by use of a
``sticker,'' i.e., a supplement affixed to the brochure that
indicates what information is being added or updated and states the
new or revised information, as long as the resulting brochure is
readable. Stickers should be dated and should be incorporated into
the text of the brochure when the brochure itself is revised.
7. Contents of Brochure. Include in the brochure prepared in
response to this Schedule:
(a) on the cover page, the sponsor's name, address, telephone
number, and the following legend in bold type or some other
prominent fashion:
This brochure provides clients with information about [name of
sponsor] and the [name of program or programs] that should be
considered before becoming a client of the [name of program or
programs]. This information has not been approved or verified by any
governmental authority.
(b) a table of contents reflecting the subject headings in the
sponsor's brochure;
(c) the amount of the wrap fee charged for each program or, if
fees vary according to a schedule established by the sponsor, a
table setting forth the fee schedule, whether such fees are
negotiable, the portion of the total fee (or the range of such
amounts) paid to persons providing advice to clients regarding the
purchase of sale of specific securities under the program
(``portfolio managers''), and the services provided under each
program (including the types of portfolio management services);
(d) a statement that the program may cost the client more or
less than purchasing such services separately and a statement of the
factors that bear upon the relative cost of the program (e.g., the
cost of the services if provided separately and the trading activity
in the client's account);
(e) if applicable, a statement that the person recommending the
program to the client receives compensation as a result of the
client's participation in the program, that the amount of this
compensation may be more than what the person would receive if the
client participated in other programs of the sponsor or paid
separately for investment advice, brokerage, and other services, and
that the person may therefore have a financial incentive to
recommend the wrap fee program over other programs or services;
7. (f) a description of the nature of any fees that the client
may pay in addition to the wrap fee and the circumstances under
which these fees may be paid (including, if applicable, mutual fund
expenses and mark-ups, mark-downs or spreads paid to market makers
from whom securities were obtained by the wrap fee broker);
(g) how the program's portfolio managers are selected and
reviewed, the basis upon which portfolio managers are recommended or
chosen for particular clients, and the circumstances under which the
sponsor will replace or recommend the replacement of the portfolio
manager;
(h) (1) if applicable, a statement to the effect that portfolio
manager performance information is not reviewed by the sponsor or a
third party and/or that performance information is not calculated on
a uniform and consistent basis,
(2) if performance information is reviewed to determine its
accuracy, the name of the party who reviews the information and a
brief description of the nature of the review,
(3) a reference to any standards (i.e., industry standards or
standards used solely by the sponsor) under which performance
information may be calculated;
(i) a description of the information about the client that is
communicated by the sponsor to the client's portfolio manager, and
how often or under what circumstances the sponsor provides updated
information about the client to the portfolio managers;
(j) any restrictions on the ability of clients to contact and
consult with portfolio managers;
(k) in narrative text, the information required by Items 7 and 8
of Part II of this form and, as applicable to clients of the wrap
fee program, the information required by Items 2, 5, 6, 9A and C,
10, 11, 13 and 14 of Part II;
(l) if any practice or relationship disclosed in response to
Items 7, 8, 9A, 9C and 13 of Part II presents a conflict between the
interests of the sponsor and those of its clients, explain the
nature of any such conflict of interest; and
(m) if the sponsor or its divisions or employees covered under
the same investment adviser registration as the sponsor act as
portfolio managers for a wrap fee program described in the brochure,
a brief, general description of the investments and investment
strategies utilized by those portfolio managers.
8. Organization and Cross References. Except for the cover page
requirements in Item 7(a) above, information contained in the
brochure need not follow the order of the items listed in Item 7.
However, the brochure should not be organized in such a manner that
important information called for by the form is obscured.
Set forth below the page(s) of the brochure on which the various
disclosures required by Item 7 are provided.
------------------------------------------------------------------------
Item No. Page(s)
------------------------------------------------------------------------
7(a)........................................................ Cover
7(b)........................................................ ..........
7(c)........................................................ ..........
7(d)........................................................ ..........
7(e)........................................................ ..........
7(f)........................................................ ..........
7(g)........................................................ ..........
7(h)........................................................ ..........
7(i)........................................................ ..........
7(j)........................................................ ..........
7(k)........................................................ ..........
7(l)........................................................ ..........
7(m)........................................................ ..........
------------------------------------------------------------------------
[FR Doc. 94-9890 Filed 4-25-94; 8:45 am]
BILLING CODE 8010-01-M
