[Federal Register Volume 66, Number 154 (Thursday, August 9, 2001)]
[Notices]
[Pages 41914-41915]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19931]


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SECURITIES AND EXCHANGE COMMISSION


Submission for OMB Review; Comment Request

Upon Written Request, Copies Available From: Securities and Exchange 
Commission Office of Filings and Information Services, Washington, 
DC 20549.
Extension:
    Rule 3a-4, SEC File No. 270-401, OMB Control No. 3235-0459.

    Notice is hereby given that, pursuant to the Paperwork Reduction 
Act of 1995 (44 U.S.C. 3501-3520), the Securities and Exchange 
Commission (the ``Commission'') has submitted to the Office of 
Management and Budget (``OMB'') a request for extension of the 
previously approved collection 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

[[Page 41915]]

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 portfolio 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 70 wrap fee and 
mutual fund wrap programs administered by 56 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, as estimate can be made by dividing total assets by the 
minimum account requirement ($395.1 billion \6\ divided by $42,500),\7\ 
for a total of 9,296,471 clients. Additionally, an average number of 
new accounts opened each year can be estimated by dividing the average 
annual increase in account assets in 1996 through 2000, by the minimum 
account requirement ($17.4 billion divided by $42,500), for an average 
annual number of new accounts of 409,412.\8\
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    \5\ See the Cerulli Report, The Market Update: The Managed 
Accounts and Wrap Industry 60 (2000) (statiscal information on wrap 
fee and mutual fund wrap programs).
    \6\ See id. at 56 (estimating amount of assets in wrap fee and 
mutual fund wrap programs).
    \7\ See id. (estimating the average minimum account 
requirements).
    \8\ 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 an/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 14,149,412.5 hours. This represents an increase of 12,020,746 hours 
from the prior estimate of 2,128,666,5 hours. The increase results from 
an increase in the amount of assets managed under investment advisory 
programs, a reduction in the average minimum account requirement from 
$100,000 to $42,500 and the resulting increase in the estimated number 
of clients in those programs.
    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.
    Compliance with the collection of information requirements of the 
rule is necessary to obtain the 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. An agency 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.
    Please direct general comments regarding the above information to 
the following persons: (i) Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Office of 
Management and Budget, New Executive Office Building, Washington, DC 
20503; and (ii) Michael E. Bartell, Associate Executive Director, 
Office of Information Technology, Securities and Exchange Commission, 
450 5th Street, NW, Washington, DC 20549. Comments must be submitted to 
OMB within 30 days of this notice.

    Dated: July 31, 2001.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-19931 Filed 8-08-01; 8:45 am]
BILLING CODE 8610-01-M