[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]


-----------------------------------------------------------------------

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'').

-----------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \1\ S. Rep. No. 293, 104th Cong., 2d Sess. 4 (1996).
    \2\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \4\ S. Rep. No. 293, 104th Cong, 2d Sess. 4 (1996).
---------------------------------------------------------------------------

    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