[Federal Register Volume 62, Number 119 (Friday, June 20, 1997)]
[Notices]
[Pages 33692-33693]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-16217]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IA-1638/803-108]
Ernst & Young Investment Advisers LLP; Notice of Application
June 16, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Advisers Act of 1940 (``Advisers Act'').
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APPLICANT: Ernst & Young Investment Advisers LLP (``EYIA'').
RELEVANT ADVISERS ACT SECTIONS: Exemption requested under section
203A(c) from section 203A(a).
SUMMARY OF APPLICATION: Applicant requests an order to permit it to
continue to be registered with the SEC as an investment adviser.
Filing Dates: The application was filed on February 20, 1997, and
amended on June 11, 1997.
Hearing or Notification of Hearing: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicant with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on July 7, 1997,
and should be accompanied by proof of service on applicant, in the form
of an affidavit or, for lawyers, a certificate of service. Hearing
requests should state the nature of writer's interest, the reason for
the request, and the issues contested. Persons may request notification
of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549.
Applicant, 787 Seventh Avenue, New York, New York 10019.
FOR FURTHER INFORMATION CONTACT: Jennifer S. Choi, Special Counsel, at
942-0725 (Division of Investment Management, Task Force on Investment
Adviser Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
SEC's Public Reference Branch.
Applicant's Representations
1. Applicant is a limited liability partnership formed under
Delaware law and owned by Ernst & Young LLP (``Ernst & Young'') and
Ernst & Young U.S. LLP. Since April 7, 1995, applicant has been
registered as an investment adviser with the SEC.
2. Applicant is responsible for the investment advisory services
provided by persons in the Personal Financial Counseling practice at
Ernst & Young, which is a functional specialty within Ernst & Young's
Tax Department.
3. Under applicant's supervision, Ernst & Young provides fee-only
personal financial and investment counseling services. Clients of this
practice area include (1) large employee groups, (2) affluent
individuals, (3) business executives (primarily through company-
sponsored programs), (4) closely-held business owners, (5) family
offices, (6) private and public foundations, (7) educational and other
not-for-profit endowments, (8) corporations, and (9) employer-sponsored
welfare and retirement plans. As to certain of these clients, Ernst &
Young personnel monitor the activities and performance of other
investment advisers selected by the client. Ernst & Young does not have
discretionary trading authority for any of its advisory clients.
4. Ernst & Young has 90 offices, which are located in 38 states,
the District of Columbia, Puerto Rico, and the U.S. Virgin Islands.
5. Applicant has determined that it is required under applicable
state laws to register as an investment adviser in 36 states (which
include Puerto Rico).
Applicant's Legal Analysis
1. In October 1996, Congress passed the National Securities Markets
Improvement Act of 1996 (``1996 Act''). Title III of the 1996 Act, the
Investment Advisers Supervision Coordination Act (``Coordination
Act''), reallocates regulatory responsibilities for investment advisers
between the SEC and the regulatory authorities of the several states.
The Coordination Act added section 203A to the Advisers Act, which
provides that the only advisers that may register with the SEC are
those with assets under management of not less than $25,000,000 or such
higher amount as the SEC may, by rule, deem appropriate in accordance
with the purposes of the Coordination Act. Section 203A(a)(2) defines
``assets under management'' as the ``securities portfolios with respect
to which an investment adviser provides continuous and regular
supervisory or management services.'' Advisers that do not meet the $25
million threshold are prohibited from registering with the SEC; those
advisers must register with the states in which they do business.
2. Instruction 8(c) to Form ADV-T provides that accounts over which
an adviser has discretionary authority and for which it provides
ongoing supervisory or management services are considered to be the
subject to continuous and regular supervisory or management services
within the meaning of section 203A(a)(2). Applicant states that it does
not meet this test because Ernst & Young does not have discretionary
authority over any of its clients' securities portfolios. Instruction
8(c) also provides that certain non-discretionary advisory arrangements
may meet the section 203A(a)(2) test, but only if the adviser has an
ongoing responsibility to select or make recommendations, based upon
the needs of the client, as to specific securities or other investments
the account may purchase or sell and, if such recommendations are
accepted by the client, is responsible for arranging or effecting the
purchase or sale. Applicant states that for certain of its clients'
portfolios, Ernst & Young does, on a daily basis, reconcile and analyze
securities trades made in clients' accounts to ensure that trades are
being executed properly. Applicant believes that this is primarily a
monitoring function; no investment recommendations are made with
respect to the portfolios except on a quarterly or less-frequent basis.
Accordingly, applicant concludes that Ernst & Young's services would
not satisfy the $25 million of assets under management test.
3. Section 203A(c) provides that the SEC, by rule or regulation
upon its own motion, or by order upon application, may permit the
registration with the SEC of any person or class of persons to which
the application of subsection (a) would be unfair, a burden on
interstate commerce, or otherwise inconsistent with the purposes of
section 203A.
4. Applicant states that Congress recognized that the definition of
``assets under management'' in the Coordination Act requires that there
be ``continuous and regular supervisory or management services, a
standard which may, in some cases, exclude firms with a national or
multi-state practice from being able to register with the SEC.'' \1\
Applicant further states that Congress intended the SEC to use its
exemptive authority to
[[Page 33693]]
permit, where appropriate, the registration of such firms with the
SEC.\2\
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\1\ S. Rep. No. 293, 104th Cong., 2d Sess. 4 (1996).
\2\ Id.
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5. Applicant notes that the SEC's release adopting the rules
implementing the Coordination Act also recognized that ``many large
advisers operating nationally have been subject to the differing laws
of many states'' and compliance with these ``overlapping, and in some
cases, duplicative'' sets of laws has ``imposed significant regulatory
burdens on these large advisers.'' \3\ Applicant further notes that the
release stated that Congress recognized that some advisers that do not
have $25 million in assets under management may still have national
businesses. As a result, the SEC was given the authority to exempt
advisers from the prohibition on SEC registration if the application of
the prohibition would be unfair, a burden on interstate commerce or
otherwise inconsistent with the purposes of Section 203A.
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\3\ Rules Implementing Amendments to the Investment Advisers Act
of 1940, Investment Advisers Act Rel. No. 1633 (May 15, 1997, 62 FR
28112 (May 22, 1997).
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6. Applicant states that Ernst & Young, under its supervision,
provides investment advisory services in offices located throughout the
United States to several hundred clients.
7. Applicant asserts that the legislation history of the
Coordination Act makes clear that it is precisely the type of entity
for which national, rather than multi-state, registration is
appropriate. Applicant notes that Congress believed that the ``states
should play an important and logical role in regulating small
investment advisers whose activities are likely to be concentrated in
their home state,'' whereas ``[1]arger advisers, with national
businesses, should be registered with the [SEC] and be subject to
national rules.'' \4\ Applicant submits that it does not have a ``home
state'' in which its activities are concentrated; rather, through Ernst
& Young personnel, it operates throughout the United States as a
national business.
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\4\ S. Rep. No. 293, 104th Cong, 2d Sess. 4 (1996).
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8. Applicant notes that many states have de minimis exceptions from
registration requirement, as does section 222(d) of the Advisers Act,
which provides a national de minimis standard. Applicant represents
that, notwithstanding these exceptions, applicant is currently required
by applicant state laws to register as an investment adviser in 36
states. Applicant also submits that Ernst & Young is a national firm,
with offices in 38 states and a client base of at least 20,000 clients,
which provides the core for the firm's investment advisory practice.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-16217 Filed 6-19-97; 8:45 am]
BILLING CODE 8010-01-M
