[Federal Register Volume 69, Number 132 (Monday, July 12, 2004)]
[Notices]
[Pages 41862-41863]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15683]


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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. 350l-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 collections 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

[[Page 41863]]

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 64 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, an estimate can be made by dividing total assets by the 
minimum account requirement ($172.3 billion \6\ divided by $40,714),\7\ 
for a total of 4,231,960 clients. Additionally, an average number of 
new accounts opened each year can be estimated by dividing the average 
annual increase in account assets in 2000 through 2003, by the minimum 
account requirement ($13.4 billion divided by $40,714), for an average 
annual number of new accounts of 329,125.\8\
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    \5\ These estimates are based on statistical information on wrap 
fee and mutual fund wrap programs provided by Cerulli Associates.
    \6\ The estimate of the amount of assets in wrap fee and mutual 
fund wrap programs was provided by Cerulli Associates.
    \7\ The estimate of the average minimum account requirement was 
provided by Cerulli Associates.
    \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 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 6,512,502.5 hours. This represents a 
decrease of 7,636,910 hours from the prior estimate of 14,149,412.5 
hours. The decrease results from a change in the method of computation 
of assets managed under investment advisory programs, and the resulting 
decrease 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 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. 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.
    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, Room 10102, New Executive Office Building, Washington, DC 
20503; or e-mail to: [email protected]; and (ii) R. Corey 
Booth, Director/Chief Information Officer, 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: June 29, 2004.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-15683 Filed 7-9-04; 8:45 am]
BILLING CODE 8010-01-P