[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.


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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

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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]
BILLING CODE 8010-01-M