[Federal Register Volume 72, Number 94 (Wednesday, May 16, 2007)]
[Notices]
[Pages 27596-27598]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-9363]


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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 (17 CFR 270.3a-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

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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 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 
industry average account size ($345.5 billion \6\ divided by 
$126,202),\7\ for a total of 2,737,675 clients. Additionally, an 
average number of new accounts opened each year can be estimated by 
dividing the average annual increase in account assets in 2003 through 
2006, by the average account size ($57.7 billion divided by $126,202), 
for an average annual number of new accounts of 457,204.\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 in 
2003. We request comment on whether the number of wrap programs and 
program sponsors has changed.
    \6\ See Cerulli Associates, The Cerulli Edge: Managed Accounts 
Edition, Advisors Issue 10 (3d quarter 2006).
    \7\ Id. at 13.
    \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 1.25 hours 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 4,449,415.5 hours. This represents a 
decrease of 2,063,087 hours from the prior estimate of 6,512,502.5 
hours. The decrease results from a change in the method of computation 
for the number of clients that participate in these investment advisory 
programs. Previously, we have computed the number of clients based on 
the minimum account requirement for participation in these programs. 
For this estimate we computed the number of clients based on the 
industry average account size in these programs resulting in a decrease 
in the estimated number of clients in these investment advisory 
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.
    Please direct general comments regarding the above information to 
the following persons: (i) Desk Officer for

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the Securities and Exchange Commission, 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, Securities and Exchange Commission, 
C/O Shirley Martinson, 6432 General Green Way, Alexandria, VA, 22312; 
or send an e-mail to: [email protected]. Comments must be submitted 
to OMB within 30 days of this notice.

    Dated: May 11, 2007.
Florence E. Hartmon,
Deputy Secretary.
 [FR Doc. E7-9363 Filed 5-15-07; 8:45 am]
BILLING CODE 8010-01-P