[Federal Register Volume 62, Number 119 (Friday, June 20, 1997)]
[Notices]
[Pages 33689-33692]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-16218]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IA-1637/803-110]
Arthur Andersen Financial Advisers; 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: Arthur Andersen Financial Advisers (``AAFA'').
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 January 30, 1997, and
amended on June 11, 1997.
[[Page 33690]]
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 the 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, 33 West Monroe Street, Chicago, Illinois 60603.
FOR FURTHER INFORMATION CONTACT:
Jennifer S. Choi, Special Counsel, at (202) 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 was created as an Illinois general partnership in
1994. Its general partners are Arthur Andersen LLP (``Arthur
Andersen''), an Illinois limited liability partnership, and Arthur
Andersen, Inc., a Delaware corporation and wholly-owned subsidiary of
Arthur Andersen.\1\ Arthur Andersen provides accounting, auditing, tax
consulting, business systems consulting, corporate finance and other
related services.
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\1\ Arthur Andersen, Inc. was organized under Delaware corporate
law for purposes of holding the Arthur Andersen name in Delaware. It
is not an operating company, but merely holds some ownership
interests in entities affiliated with Arthur Andersen.
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2. Applicant was established to supervise the investment advice
rendered in connection with personal and institutional financial
planning and employee benefit plan consulting services (collectively,
``investment advisory services'') provided by partners and professional
employees of Arthur Andersen to clients of Arthur Andersen.\2\ Personal
financial planning services may include such things as personal tax and
cash flow planning, estate planning, retirement planning, educational
funding, insurance planning, compensation and benefits planning, and
the preparation of financial analyses and personal financial statements
reflecting net worth, cash flow, and income tax projections. In this
connection, applicant supervises matters such as the allocation of
assets among different investment categories, portfolio
diversification, managing portfolio risk and general economic and
financial topics.
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\2\ Arthur Andersen received a no-action letter from the
Division of Investment Management in reliance upon which the
applicant registered under the Advisers Act in connection with
investment advisory services provided by Arthur Andersen partners
and professional employees to the extent that these services are
supervised by and in accordance with policies and procedures
established by applicant. See Arthur Andersen & Co. (pub. avail.
July 8, 1994) (``Arthur Andersen Letter'').
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3. Applicant also supervises activities involving similar types of
investment advisory services provided to employee benefit plan clients
of Arthur Andersen. These services include performing an actuarial
study of the employee benefit plan and its related cash flows to assist
the employee benefit plan client in developing an asset allocation
matrix. An employee benefit plan client may request that applicant
review the plan's portfolio for compliance with the plan's investment
objectives, compare a money manager's or mutual fund's performance with
those of agreed upon market indices or benchmarks, and report material
changes relating to a money manager. As part of its investment advisory
services, applicant conducts educational seminars and provides its
clients other educational tools, such as workshops, software and
newsletters. Applicant, from time to time, provides independent
fiduciary services for certain clients governed by the Employee
Retirement Income Security Act of 1974. Neither applicant nor Arthur
Andersen has custody of client assets in connection with the provision
of investment advisory services. In addition, neither applicant nor
Arthur Andersen manages client accounts on either a discretionary or a
non-discretionary basis.
4. Since March 1995, applicant has been registered as an investment
adviser with the SEC. Applicant provides investment advisory services
from 51 offices located in 39 states (which includes the District of
Columbia and the Commonwealth of Puerto Rico) to over 500 clients
nationwide.
5. Applicant has established and maintains a strong centralized
form of governance to supervise effectively these investment advisory
services. Applicant is governed by an advisory board of Arthur Andersen
partners and principals. Applicant has established policies regarding
the scope and content of any investment advice rendered by applicant
and is responsible for supervising compliance with these policies.
6. On October 11, 1996, the National Securities Markets Improvement
Act of 1996 (``1996 Act'') was enacted. Title III of the 1996 act, the
Investment Advisers Supervision Coordination Act (``Coordination
Act''), added section 203A to the Advisers Act, which allocates
regulatory responsibilities between federal and state securities
regulators for the registration and oversight of investment advisers.
Section 203A(a)(1) prohibits an investment adviser that is regulated or
required to be regulated as an investment adviser in the state in which
it maintains its principal office and place of business from
registering with the SEC unless the investment adviser (i) has assets
under management of $25 million or more or (ii) acts as an investment
adviser to an investment company registered under section 8 of the
Investment Company Act of 1940 (``1940 Act''). Section 203A(a)(2)
defines the phrase ``assets under management'' as the securities
portfolios with respect to which an investment adviser provides
continuous and regular supervisory or management services. The states
may require registration of investment advisers that are not subject to
SEC registration. The extent to which a state may require registration
of such investment advisers, however, is subject to a national de
minimus standard. The Coordination Act added section 222 to the
Advisers Act, which, among other things, exempts investment advisers
from the registration requirements of a state if they do not have a
place of business \3\ located in the state and have had fewer than six
clients during the preceding 12 months who are residents of the state.
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\3\ Rule 222-1 defines ``place of business'' of an investment
adviser to mean an office at which the investment adviser regularly
provides investment advisory services, solicits, meets with, or
otherwise communicates with clients and any other location that is
held out to the general public as a location at which the investment
adviser provides investment advisory services, solicits, meets with,
or otherwise communicates with clients. 17 CFR 275.222-1.
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7. Applicant does not actively manage client securities portfolios,
either on a discretionary or non-discretionary basis, and does not
provide ``continuous and regular supervisory or management services''
with respect to customer accounts.\4\ Nor does applicant act as an
[[Page 33691]]
investment adviser to an investment company registered under the 1940
Act. Furthermore, applicant maintains its principal office and place of
business in Illinois, which does regulate applicant as an investment
adviser. Therefore, in the absence of exemptive relief, applicant
believes section 203A(a)(1) would prohibit applicant from registering
with the SEC as an investment adviser.
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\4\ Instruction 8(c) to Form ADV-T states that accounts over
which an adviser has discretionary authority and for which it
provides ongoing supervisory or management services and accounts
over which an adviser does not have discretionary authority, but 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 are considered to be the
subject of continuous and regular supervisory or management services
within the meaning of section 203A(a)(2). Applicant states that it
does not satisfy either of these provisions.
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Applicant's Legal Analysis
1. Section 203A(c) authorizes the SEC to permit an investment
adviser to register with the SEC if prohibiting registration would be
unfair, a burden on interstate commerce, or otherwise inconsistent with
the purposes of section 203A. For the reasons discussed below,
applicant believes that it meets the standards for exemptive relief
under section 203A(c).
2. Applicant believes Congress intended section 203A to streamline
the registration and oversight of investment advisers by dividing
responsibilities between the SEC and the states to make more efficient
use of the limited resources of federal and state governments. To this
end, applicant notes that Congress determined that the states should be
responsible for regulating investment advisers ``whose activities are
likely to be concentrated in their home state,'' but ``[l]arger
advisers, with national businesses'' should be regulated by the SEC and
be ``subject to national rules.'' \5\ Applicant submits that Congress
chose an assets-under-management requirement as a rough proxy that
would divide responsibilities between the SEC and the states on the
theory that investment advisers managing $25 million or more in assets
are likely to be national investment advisers that should be subject to
the national rules of the SEC, while investment advisers managing under
$25 million are likely to be small investment advisers that should be
subject to the local rules of the various states.
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\5\ S. Rep. No. 293, 104th Cong. 2d Sess. 4 (1996).
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3. Applicant believes that Congress recognized that the assets-
under-management requirement does not precisely differentiate national
investment advisers from local investment advisers, and that some
national investment advisers may not qualify for registration with the
SEC under the test formulated by Congress. Applicant states that
Congress noted that ``the definition `assets under management' requires
that there be continuous and regular supervisory or management
services--a standard which may, in some cases, exclude firms with a
national or multistate practice from being able to register with the
[SEC].'' \6\ To remedy any unfairness, burdens, or inconsistencies
caused by the assets-under-management requirement, applicant notes that
Congress directed the SEC to use its exemptive authority to ``permit,
where appropriate, the registration of such firms'' with the SEC and to
address situations in which investment advisers with a ``national or
multistate practice'' were otherwise prohibited from registering with
the SEC.\7\
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\6\ Id. at 5.
\7\ Id.
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4. Applicant asserts that it engages in a national, multistate
practice and, therefore, is the type of investment adviser that
Congress directed the SEC to consider exempting under section 203A(c).
Applicant conducts its investment advisory services from 51 offices in
39 states to over 500 clients nationwide. Applicant claims that the
extent of applicant's investment advisory services means that it does
not qualify for the national de minimis standard, as set forth in
section 222 of the Advisers Act, in 38 states (including the District
of Columbia and the Commonwealth of Puerto Rico) because either it has
a place of business in those states or has provided investment advisory
services to more than five clients during the preceding 12 months who
are residents of those states. Applicant also states that it qualifies
for a state exemption from registration that is broader than the
national de minimis standard in only one state. Consequently, applicant
represents that it is legally obligated to register under the
investment adviser statutes in 37 states (including the District of
Columbia and the Commonwealth of Puerto Rico).\8\
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\8\ Applicant explains that the determination of the states in
which it is legally obligated to register as an investment adviser
is based upon: (i) applicant's information about its current
clients, and (ii) a review of generally available standard
compilations of state securities laws and regulations commonly used
for purposes of determining investment adviser registration.
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5. Applicant asserts that prohibiting its continued registration
with the SEC would be unfair because the applicant's investment
advisory business is substantially similar to that of other national
investment advisers that are eligible for SEC registration and
oversight. Applicant notes that it and other national investment
advisers provide investment advisory services to clients throughout the
nation, and are registered as investment advisers with the SEC and
multiple states. Applicant also notes that the primary difference
between applicant and other national investment advisers is the manner
in which client accounts are managed. Pursuant to the Arthur Andersen
Letter, applicant submits that it was permitted to register as an
investment adviser, in lieu of Arthur Andersen so registering, to
supervise the activities of partners and professional employees of
Arthur Andersen, but the investment advisory services of applicant were
restricted so that it cannot exercise discretionary authority over
client accounts or provide investment advice concerning specific
securities or mutual funds. Applicant asserts that the fact that its
business is restricted by the terms of the Arthur Andersen Letter does
not diminish in any way the national stature of its business and that
it should be able to continue under the registration and oversight of
the SEC, just as other, similarly situated national investment
advisers.
6. Applicant asserts that it would be a burden on interstate
commerce if it is prohibited from being registered with and under the
oversight of the SEC. Applicant believes that continued registration
with and oversight by the SEC would promote the advisory board's
uniform policies and procedures and facilitate centralized compliance
standards.
7. Applicant also believes that it would be inconsistent with the
purposes of section 203A if it is prohibited from being registered with
the SEC. Applicant asserts that Congress intended that national
investment advisers remain under SEC registration and oversight, in
part, to focus SEC supervision and examination resources on investment
advisers involved in interstate commerce. Applicant contends that the
centralized nature of applicant's activities lends itself to
supervision and examination by one regulatory body. Applicant also
believes that Congress established a method, which was not intended as
the sole method, to identify and divide investment advisers with a
national presence and those with a local presence based upon assets
under management. Applicant argues that Congress recognized the
imprecision of this rough proxy and, therefore, directed the SEC to
address those cases in which
[[Page 33692]]
national investment advisers do not satisfy the assets under management
requirement.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-16218 Filed 6-19-97; 8:45 am]
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