[Federal Register Volume 63, Number 174 (Wednesday, September 9, 1998)]
[Notices]
[Pages 48278-48280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-24093]


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SECURITIES AND EXCHANGE COMMISSION


Existing Collection; Comment Request

Upon written request, copies available from: Securities and Exchange 
Commission, Office of Filings and Information Services, 450 5th Street, 
NW, Washington, DC 20549.

Extension:

[[Page 48279]]

    Rule 3a-4, SEC File No. 270-401, OMB Control No. 3235-0459
    Form N-8B-2, SEC File No. 270-186, OMB Control No. 3235-0186

    Notice is hereby given that pursuant to the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3501 et seq.) the Securities and Exchange Commission 
(``Commission'') has submitted to the Office of Management and Budget 
request[s] for extension of the previously approved collection[s] of 
information discussed below.
    Rule 3a-4 under the Investment Company Act of 1940 [15 U.S.C. 80a] 
(``Investment Company Act'' or ``Act'') provides a nonexclusive safe 
harbor from the definition of investment company under the Act for 
certain investment advisory programs. These programs, which include 
``wrap fee'' and ``mutual fund wrap'' programs, generally are designed 
to provide professional portfolio management services to clients who 
are investing less than the minimum usually required by portfolio 
managers but more than the minimum account size of most mutual funds. 
Under wrap fee and similar programs, a client's account is typically 
managed on a discretionary basis according to pre-selected investment 
objectives. Clients with similar investment objectives often receive 
the same investment advice and may hold the same or substantially the 
same securities in their accounts. Some of these investment advisory 
programs may meet the definition of investment company under the Act 
because of the similarity of account management.
    In 1997, the Commission adopted rule 3a-4, which clarifies that 
programs organized and operated in a manner consistent with the 
conditions of rule 3a-4 are not required to register under the 
Investment Company Act or comply with the Act's requirements.\1\ These 
programs differ from investment companies because, among other things, 
they provide individualized investment advice to the client. The rule's 
provisions have the effect of ensuring that clients in a program 
relying on the rule receive advice tailored to the client's needs.
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    \1\ Status of Investment Advisory Programs Under the Investment 
Company Act of 1940, Investment Company Act Release No. 22579 (Mar. 
24, 1997) [62 FR 15098 (Mar. 31, 1997)] (``Adopting Release''). In 
addition, there are no registration requirements under section 5 of 
the Securities Act of 1933 for these programs. See 17 CFR 270.3a-4, 
introductory note.
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    Rule 3a-4 provides that each client's account must be managed on 
the basis of the client's financial situation and investment objectives 
and consistent with any reasonable restrictions the client imposes on 
managing the account. When an account is opened, the sponsor \2\ (or 
its designee) must obtain information from each client regarding the 
client's financial situation and investment objectives, and must allow 
the client an opportunity to impose reasonable restrictions on managing 
the account.\3\ In addition, the sponsor (or its designee) annually 
must contact the client to determine whether the client's financial 
situation or investment objectives have changed and whether the client 
wishes to impose any reasonable restrictions on the management of the 
account or reasonably modify existing restrictions. The sponsor (or its 
designee) also must notify the client quarterly, in writing, to contact 
the sponsor (or the designee) regarding changes to the client's 
financial situation, investment objectives, or restrictions on the 
account's management.\4\
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    \2\ For purposes of rule 3a-4, the term ``sponsor'' refers to 
any person who receives compensation for sponsoring, organizing or 
administering the program, or for selecting, or providing advice to 
clients regarding the selection of, persons responsible for managing 
the client's account in the program.
    \3\ Clients specifically must be allowed to designate securities 
that should not be purchased for the account or that should be sold 
if held in the account. The rule does not require that a client be 
able to require particular securities be purchased for the account.
    \4\ The sponsor also must provide a means by which clients can 
contact the sponsor (or its designee).
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    The program must provide each client with a quarterly statement 
describing all activity in the client's account during the previous 
quarter. The sponsor and personnel of the client's account manager who 
know about the client's account and its management must be reasonably 
available to consult with the client. Each client also must retain 
certain indicia of ownership of all securities and funds in the 
account.
    Rule 3a-4 is intended primarily to provide guidance regarding the 
status of investment advisory programs under the Investment Company 
Act. The rule is not intended to create a presumption about a program 
that is not operated according to the rule's guidelines.
    The requirement that the sponsor (or its designee) obtain 
information about the client's financial situation and investment 
objectives when the account is opened is designed to ensure that the 
investment adviser has sufficient information regarding the client's 
unique needs and goals to enable the portfolio manager to provide 
individualized investment advice. The sponsor is required to contact 
clients annually and provide them with quarterly notices to ensure that 
the sponsor has current information about the client's financial 
status, investment objectives, and restrictions on management of the 
account. Maintaining current information enables the program manager to 
evaluate the client's portfolio in light of the client's changing needs 
and circumstances. The requirement that clients be provided with 
quarterly statements of account activity is designed to ensure the 
client receives an individualized report, which the Commission believes 
is a key element of individualized advisory services.
    The Commission staff estimates that approximately 49 wrap fee and 
mutual fund wrap programs administered by 44 program sponsors use the 
procedures under rule 3a-4.\5\ Although it is impossible to determine 
the exact number of clients that participate in investment advisory 
programs, an estimate can be made by dividing total assets by the 
minimum account requirement ($139.4 billion \6\ divided by $100,000), 
for a total of 1,394,000 clients. In addition, an average number of new 
accounts opened each year can be estimated by dividing the average 
annual increase in account assets in 1994 through 1997, by the minimum 
account requirement ($7.5 billion divided by $100,000), for an average 
annual number of new accounts of 75,333.\7\
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    \5\ See The Cerulli Report, Asset-Based Strategies: Developments 
In The Financial Advisor And Wrap Markets 66 (1997) (statistical 
information on wrap fee and mutual fund wrap programs).
    \6\ See id. at 63 (estimating amount of assets in wrap fee and 
mutual fund wrap programs).
    \7\ The requirement for initial client contact and evaluation is 
not a recurring obligation, but only occurs when the account is 
opened. The estimated annual hourly burden is based on the average 
number of new accounts opened each year.
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    The Commission staff estimates that each program sponsor spends 
approximately one hour annually in preparing, conducting and/or 
reviewing interviews for each new client; 30 minutes annually 
preparing, conducting and/or reviewing annual interviews for each 
continuing client; and one hour preparing and mailing quarterly account 
activity statements, including the notice to update information to each 
client. Based on the foregoing, the Commission staff therefore 
estimates the total annual burden of the rule's paperwork requirements 
for all program sponsors to be 2,128,666.5 hours. This represents an 
increase of 1,112,666.5 hours from the prior estimate of 1,016,000 
hours. The increase results primarily from an increase in the amount of 
assets managed under investment advisory programs and the resulting 
increase in the estimated number of clients in those

[[Page 48280]]

programs. The increase also results from a more accurate calculation of 
certain collection of information burdens. Compliance with the 
collection of information requirements of the rule is necessary to 
obtain the benefit of relying on the rule's safe harbor. Nevertheless, 
rule 3a-4 is a nonexclusive safe harbor, and a program that does not 
comply with the rule's collection of information requirements does not 
necessarily meet the Investment Company Act's definition of investment 
company.
    Form N-8B-2 is the form used by unit investment trusts (``UITs'') 
which are currently issuing securities, including UITs which are 
issuers of periodic payment plan certificates and UITs of which a 
management investment company is the sponsor or depositor, to comply 
with the filing and disclosure requirements imposed by section 8(b) of 
the Act. Form N-8B-2 requires disclosure about the organization of a 
UIT, its securities, the trustee, the personnel and affiliated persons 
of the depositor, the distribution and redemption of securities, and 
financial statements. The Commission uses the information provided in 
the collection of information to determine compliance with section 8(b) 
of the Act.
    Based on the Commission's industry statistics, the Commission 
estimates that there will be approximately 34 initial filings on Form 
N-8B-2 and 11 post-effective amendment filings to the Form. The 
Commission estimates that each registrant filing an initial Form N-8B-2 
would spend 1,150 hours in preparing and filing the Form and that the 
total hour burden for all initial Form N-8B-2 filings is 39,100 hours. 
Also, the Commission estimates that each UIT filing a post-effective 
amendment to Form N-8B-2 would spend 150 hours in preparing and filing 
the amendment and that the total hour burden for all post-effective 
amendments to the Form is 1,650 hours. By combining the total hour 
burdens estimated for initial Form N-8B-2 filings and post-effective 
amendment filings to the Form, the Commission estimates that the total 
annual burden hours for all registrants on Form N-8B-2 is 40,750 hours.
    The collection of information on Form N-8B-2 is mandatory. The 
information provided on Form N-8B-2 is not kept confidential.
    The estimate of average burden hours is made solely for the 
purposes of the Paperwork Reduction Act. The estimate is not derived 
from a comprehensive or even a representative survey or study of the 
costs of Commission rules and forms.
    The Commission may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid OMB control number.
    Written comments regarding the above information should be directed 
to the following persons: (i) Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Office of Management and Budget, Room 10202, New Executive Office 
Building, Washington, D.C. 20503; and (ii) Michael E. Bartell, 
Associate Executive Director, Office of Information Technology, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 20549. Comments must be submitted to OMB within 30 days of this 
notice.

    Dated: September 1, 1998.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-24093 Filed 9-8-98; 8:45 am]
BILLING CODE 8010-01-M