[Federal Register Volume 81, Number 235 (Wednesday, December 7, 2016)]
[Notices]
[Pages 88294-88297]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29297]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IA-4578; File No. 803-00236]
Merrill Lynch, Pierce, Fenner & Smith Incorporated; Notice of
Application
December 1, 2016.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an exemptive order under section 206A
of the Investment Advisers Act of 1940 (``Advisers Act'') providing an
exemption from the written disclosure and consent requirements of
section 206(3).
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Applicant: Merrill Lynch, Pierce, Fenner & Smith Incorporated
(``Applicant'').
Relevant Advisers Act Sections: Exemption requested under section
206A from the written disclosure and consent requirements of section
206(3).
Summary of Application: Applicant requests that the Commission
issue an order under section 206A exempting it and Future Advisers (as
defined below) from the written disclosure and consent requirements of
section 206(3) with respect to principal transactions with
nondiscretionary advisory client accounts.
Filing Dates: The application was filed on November 23, 2016.
Hearing or Notification of Hearing: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by writing to the Commission's
Secretary and serving Applicant with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on December 27, 2016, and should be accompanied by proof of
service on Applicant, in the form of an affidavit or, for lawyers, a
certificate of service. Pursuant to rule 0-5 under the Advisers Act,
hearing requests should state the nature of the writer's interest, any
facts bearing upon the desirability of a hearing on the matter, the
reason for the request, and the issues contested. Persons who wish to
be notified of a hearing may request notification by writing to the
Commission's Secretary.
[[Page 88295]]
ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
Street NE., Washington, DC 20549-1090. Applicant, Mackenzie E. Crane,
Esq., Bank of America, 100 Federal Street, MA5-100-03-09, Boston, MA
02110 or James E. Anderson, Esq. and Kimberly B. Saunders, Esq.,
Willkie Farr & Gallagher LLP, 1875 K Street NW., Washington, DC 20006.
FOR FURTHER INFORMATION CONTACT: Robert Shapiro, Senior Counsel, at
(202) 551-7758 (Chief Counsel's Office, Division of Investment
Management) or Melissa Harke, Senior Special Counsel, at (202) 551-6787
(Investment Adviser Regulation Office, Division of Investment
Management).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site at http://www.sec.gov/rules/iareleases.shtml or
by calling (202) 551-8090.
Applicant seeks relief from the written disclosure and consent
requirements of section 206(3) of the Advisers Act that would be
similar to relief currently provided by Advisers Act rule 206(3)-3T
(the ``Rule''), which will expire by its terms on December 31, 2016.
The relief sought by Applicant, if granted, would be subject to
conditions similar to those under the Rule, as well as certain revised
or additional conditions.
Applicant's Representations
1. The Applicant is registered as an investment adviser with the
Commission and is a registered broker-dealer. The Applicant is a
subsidiary of Bank of America Corporation, a diversified financial
services company with operations around the world. The Applicant offers
a number of advisory programs, including Merrill Lynch Personal Advisor
(``MLPA''), a nondiscretionary advisory program, and Merrill Lynch
Investment Advisory Program (``MLIAP''). While the Applicant offers
both discretionary and nondiscretionary advisory services under MLIAP,
the relief sought by the Applicant, as it relates to MLIAP, is limited
to the client accounts enrolled in nondiscretionary strategies.
2. In 2007, many of the Applicant's fee-based brokerage accounts
were converted to nondiscretionary advisory accounts in MLPA, following
the invalidation of former rule 202(a)(11)-1 under the Advisers Act.
When these accounts had been fee-based brokerage accounts, the
Applicant, in its capacity as a broker-dealer, engaged in principal
transactions with its customers, in accordance with applicable law. The
Applicant currently relies on the Rule to engage in principal
transactions with its client accounts in MLPA and client accounts
enrolled in nondiscretionary strategies in MLIAP.
3. The Applicant currently has approximately 393,535 client
accounts enrolled in nondiscretionary strategies in MLIAP. Those
accounts have approximately $157 billion in assets under management as
of June 30, 2016. In the period January 1, 2015 through December 31,
2015, there were approximately 53.9 million trades in MLIAP, involving
approximately $79.1 billion in securities. In the period January 1,
2015 through December 31, 2015, 25,114 trades were effected in reliance
on the Rule in 5,978 unique accounts, representing an approximate
average of 4.2 such trades per account. Approximately 70 percent of the
trades done in reliance on the Rule in this period were purchases by
client accounts; the average purchase was approximately $55,850.
Approximately 30 percent of the trades done in reliance on the Rule in
this period were sales from client accounts; the average sale was
approximately $41,504.
4. In 2013, the Applicant began transitioning its investment
advisory client accounts from five legacy investment advisory programs,
including MLPA, to MLIAP. The Applicant currently has approximately
3,239 client accounts remaining in MLPA. Those accounts have
approximately $5.5 billion in assets under management as of June 30,
2016. It is expected that these client accounts will either transition
to MLIAP or terminate their investment advisory relationship with the
Applicant, at which point MLPA will be retired. In the period January
1, 2015 through December 31, 2015, there were approximately 675,000
trades in MLPA, involving approximately $13 billion in securities. In
the period January 1, 2015 through December 31, 2015, 11,400 trades
were effected in reliance on the Rule in 2,857 unique accounts,
representing an approximate average of 4 such trades per account.
Approximately 70 percent of the trades done in reliance on the Rule in
this period were purchases by client accounts; the average purchase was
approximately $77,600. Approximately 30 percent of the trades done in
reliance on the Rule in this period were sales from client accounts;
the average sale was approximately $77,517.
5. From January 1, 2015 to December 31, 2015, Applicant did not
rely on the Rule for any principal trades in securities it underwrote.
Any principal transactions in securities that are underwritten by the
Applicant are effected in accordance with section 206(3) of the
Advisers Act.
6. The Applicant acknowledges that the Order, if granted, would not
be construed as relieving in any way the Applicant from acting in the
best interests of an advisory client, including fulfilling the duty to
seek the best execution for the particular transaction for the advisory
client; nor shall it relieve the Applicant from any obligation that may
be imposed by sections 206(1) or (2) of the Advisers Act or by other
applicable provisions of the federal securities laws or applicable
FINRA rules.
Applicant's Legal Analysis
1. Section 206(3) provides that it is unlawful for any investment
adviser, directly or indirectly, acting as principal for its own
account, knowingly to sell any security to or purchase any security
from a client, without disclosing to the client in writing before the
completion of the transaction the capacity in which the adviser is
acting and obtaining the client's consent to the transaction. Rule
206(3)-3T deems an investment adviser to be in compliance with the
provisions of section 206(3) of the Advisers Act when the investment
adviser, or a person controlling, controlled by, or under common
control with the investment adviser, acting as principal for its own
account, sells to or purchases from an advisory client any security,
provided that the investment adviser complies with the conditions of
the Rule.
2. Rule 206(3)-3T requires, among other things, that the investment
adviser obtain a client's written, revocable consent prospectively
authorizing the adviser, directly or indirectly, acting as principal
for its own account, to sell any security to or purchase any security
from the client. The consent must be obtained after the adviser
provides the client with written disclosure about: (i) The
circumstances under which the investment adviser may engage in
principal transactions with the client; (ii) the nature and
significance of the conflicts the investment adviser has with its
client's interests as a result of those transactions; and (iii) how the
investment adviser addresses those conflicts. The investment adviser
also must provide trade-by-trade disclosure to the client, before the
execution of each principal transaction, of the capacity in which the
adviser may act with respect to the transaction, and obtain the
client's consent (which may be written or oral) to the transaction. The
Rule is available only to an
[[Page 88296]]
investment adviser that is also a broker-dealer registered under
section 15 of the Securities Exchange Act of 1934 (``Exchange Act'')
and may only be relied upon with respect to a nondiscretionary account
that is a brokerage account subject to the Exchange Act, and the rules
thereunder, and the rules of the self-regulatory organization(s) of
which it is a member. Rule 206(3)-3T is not available for principal
transactions if the investment adviser or a person who controls, is
controlled by, or is under common control with the adviser (``control
person'') is the issuer or is an underwriter of the security, except
that an adviser may rely on the Rule for trades in which the adviser or
a control person is an underwriter of non-convertible investment-grade
debt securities.
3. The investment adviser also must provide to the client a trade
confirmation that, in addition to the requirements of rule 10b-10 under
the Exchange Act, includes a conspicuous, plain English statement
informing the client that the investment adviser disclosed to the
client before the execution of the transaction that the investment
adviser may act as principal in connection with the transaction, that
the client authorized the transaction, and that the investment adviser
sold the security to or bought the security from the client for its own
account. The investment adviser also must deliver to the client, at
least annually, a written statement listing all transactions that were
executed in the account in reliance on the Rule, including the date and
price of each transaction.
4. Rule 206(3)-3T is scheduled to expire on December 31, 2016. Upon
expiration, the Applicant would be required to provide trade-by-trade
written disclosure to each nondiscretionary advisory client with whom
the Applicant sought to engage in a principal transaction in accordance
with section 206(3). The Applicant submits that its nondiscretionary
clients, through the Applicant's current reliance on the Rule, have had
access to the Applicant's inventory through principal transactions for
a number of years, and expect to continue to have such access in the
future. The Applicant believes that engaging in principal transactions
with its clients provides certain benefits to its clients, including
access to securities of limited availability, such as municipal bonds,
and that the written disclosure requirement of section 206(3) acts as
an operational barrier to its ability to engage in principal trades
with its clients, especially when the transaction involves securities
of limited availability.
5. Unless the Applicant is provided an exemption from the written
disclosure and client consent requirements of section 206(3), Applicant
believes that it will be unable to provide the same range of services
and access to the same types of securities to its nondiscretionary
advisory clients as it currently is able to provide to clients under
the Rule.
6. The Applicant notes that, if the requested relief is granted, it
will remain subject to the fiduciary duties that are generally
enforceable under sections 206(1) and 206(2) of the Advisers Act,
which, in general terms, require the Applicant to: (i) Disclose
material facts about the advisory relationship to its clients; (ii)
treat each client fairly; and (iii) act only in the best interests of
its client, disclosing conflicts of interest when present and obtaining
client consent to arrangements that present such conflicts.
7. The Applicant further notes that, in its capacity as a broker-
dealer with respect to these accounts, it will remain subject to a
comprehensive set of Commission and FINRA regulations that apply to the
relationship between a broker-dealer and its customer in addition to
the fiduciary duties an adviser owes a client. These rules require,
among other things, that the Applicant deal fairly with its customers,
seek to obtain best execution of customer orders, and make only
suitable recommendations. These obligations are designed to promote
business conduct that protects customers from abusive practices that
may not necessarily be fraudulent, and to protect against unfair prices
and excessive commissions. Specifically, these provisions, among other
things, require that the prices charged by the Applicant be reasonably
related to the prevailing market, and limit the commissions and mark-
ups the Applicant can charge. Additionally, these obligations require
that the Applicant have a reasonable basis to believe that a
recommended transaction or investment strategy involving a security or
securities is suitable for the customer, based on information obtained
through reasonable diligence.
8. The Applicant requests that the Commission issue an Order
pursuant to section 206A exempting it from the written disclosure and
consent requirements of section 206(3) only with respect to client
accounts in MLPA, nondiscretionary strategies in MLIAP, and any similar
nondiscretionary program to be created in the future. The Applicant
also requests that the Commission's Order apply to future investment
advisers controlling, controlled by, or under common control with the
Applicant (``Future Advisers''). Any Future Adviser relying on any
Order granted pursuant to the application will comply with the terms
and conditions stated in the application.\1\
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\1\ All entities that currently intend to rely on any order
granted pursuant to the application are named as Applicants.
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Applicant's Conditions
The Applicant agrees that any Order granting the requested relief
will be subject to the following conditions:
1. The investment adviser will exercise no ``investment
discretion'' (as such term is defined in section 3(a)(35) of the
Exchange Act), except investment discretion granted by the advisory
client on a temporary or limited basis,\2\ with respect to the client's
account.
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\2\ Discretion is considered to be temporary or limited for
purposes of this condition when the investment adviser is given
discretion: (i) As to the price at which or the time to execute an
order given by a client for the purchase or sale of a definite
amount or quantity of a specified security; (ii) on an isolated or
infrequent basis, to purchase or sell a security or type of security
when a client is unavailable for a limited period of time not to
exceed a few months; (iii) as to cash management, such as to
exchange a position in a money market fund for another money market
fund or cash equivalent; (iv) to purchase or sell securities to
satisfy margin requirements; (v) to sell specific bonds and purchase
similar bonds in order to permit a client to take a tax loss on the
original position; (vi) to purchase a bond with a specified credit
rating and maturity; and (vii) to purchase or sell a security or
type of security limited by specific parameters established by the
client. See, e.g., Temporary Rule Regarding Principal Trades with
Certain Advisory Clients, Investment Advisers Act Release No. 2653
(Sept. 24, 2007) at n. 31.
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2. The investment adviser will not trade in reliance on this Order
any security for which the investment adviser or any person
controlling, controlled by, or under common control with the investment
adviser is the issuer, or, at the time of the sale, an underwriter (as
defined in section 202(a)(20) of the Advisers Act).
3. The investment adviser will not directly or indirectly require
the client to consent to principal trading as a condition to opening or
maintaining an account with the investment adviser.
4. The advisory client has executed a written revocable consent
prospectively authorizing the investment adviser directly or indirectly
to act as principal for its own account in selling any security to or
purchasing any security from the advisory client. The advisory client's
written consent must be obtained through a signature or other positive
manifestation of consent that is separate from or in addition to the
signature indicating the client's consent to the advisory agreement.
The separate
[[Page 88297]]
or additional signature line or alternative means of expressing consent
must be preceded immediately by prominent, plain English disclosure
containing either: (a) An explanation of: (i) The circumstances under
which the investment adviser directly or indirectly may engage in
principal transactions; (ii) the nature and significance of conflicts
with its client's interests as a result of the transactions; and (iii)
how the investment adviser addresses those conflicts; or (b) a
statement explaining that the client is consenting to principal
transactions, followed by a cross-reference to a specific document
provided to the client containing the disclosure in (a)(i)-(iii) above
and to the specific page or pages on which such disclosure is located;
provided, however, that if the investment adviser requires time to
modify its electronic systems to provide the disclosure in (a)(i)-(iii)
above immediately preceding the separate or additional signature line,
the investment adviser may, while updating such electronic systems, and
for no more than 90 days from the date of the Order, instead provide a
cross-reference to a specific document provided to the client
containing the disclosure in (a)(i)-(iii) above and to the specific
section in such document in which such disclosure is located.
Transition provision: To the extent that the adviser obtained fully
informed written revocable consent from an advisory client for purposes
of rule 206(3)-3T(a)(3) prior to the date of this Order, the adviser
may rely on this Order with respect to such client without obtaining
additional prospective consent from such client.
5. The investment adviser, prior to the execution of each
transaction in reliance on this Order, will: (a) Inform the advisory
client, orally or in writing, of the capacity in which it may act with
respect to such transaction; and (b) obtain consent from the advisory
client, orally or in writing, to act as principal for its own account
with respect to such transaction.
6. The investment adviser will send a written confirmation at or
before completion of each such transaction that includes, in addition
to the information required by rule 10b-10 under the Exchange Act, a
conspicuous, plain English statement informing the advisory client that
the investment adviser: (a) Disclosed to the client prior to the
execution of the transaction that the adviser may be acting in a
principal capacity in connection with the transaction and the client
authorized the transaction; and (b) sold the security to, or bought the
security from, the client for its own account.
7. The investment adviser will send to the client, no less
frequently than annually, written disclosure containing a list of all
transactions that were executed in the client's account in reliance
upon this Order, and the date and price of each such transaction.
8. The investment adviser is a broker-dealer registered under
section 15 of the Exchange Act and each account for which the
investment adviser relies on this Order is a brokerage account subject
to the Exchange Act, and the rules thereunder, and the rules of the
self-regulatory organization(s) of which it is a member.
9. Each written disclosure required as a condition to this Order
will include a conspicuous, plain English statement that the client may
revoke the written consent referred to in Condition 4 above without
penalty at any time by written notice to the investment adviser in
accordance with reasonable procedures established by the investment
adviser, but in all cases such revocation must be given effect within 5
business days of the investment adviser's receipt thereof.
10. The investment adviser will maintain records sufficient to
enable verification of compliance with the conditions of this Order.
Such records will include, without limitation: (a) Documentation
sufficient to demonstrate compliance with each disclosure and consent
requirement under this Order; (b) in particular, documentation
sufficient to demonstrate that, prior to the execution of each
transaction in reliance on this Order, the adviser informed the
advisory client of the capacity in which it may act with respect to the
transaction and that it received the advisory client's consent (if the
investment adviser informs the client orally of the capacity in which
it may act with respect to such transaction or obtains oral consent,
such records may, for example, include recordings of telephone
conversations or contemporaneous written notations); and (c)
documentation sufficient to enable assessment of compliance by the
investment adviser with sections 206(1) and (2) of the Advisers Act in
connection with its reliance on this Order.\3\ In each case, such
records will be maintained and preserved in an easily accessible place
for a period of not less than five years, the first two years in an
appropriate office of the investment adviser, and be available for
inspection by the staff of the Commission.
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\3\ For example, under sections 206(1) and (2), an adviser may
not engage in any transaction on a principal basis with a client
that is not consistent with the best interests of the client or that
subrogates the client's interests to the adviser's own. Cf.
Investment Advisers Act Release No. 2106 (Jan. 31, 2003) (adopting
Rule 206(4)-6).
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11. The investment adviser will adopt written compliance policies
and procedures reasonably designed to ensure, and the investment
adviser's chief compliance officer will monitor, the investment
adviser's compliance with the conditions of this Order. The investment
adviser's chief compliance officer will, on at least a quarterly basis,
conduct testing reasonably sufficient to verify such compliance. Such
written policies and procedures, monitoring and testing will address,
without limitation: (a) Compliance by the investment adviser with its
disclosure and consent requirements under this Order; (b) the integrity
and operation of electronic systems employed by the investment adviser
in connection with its reliance on this Order; (c) compliance by the
investment adviser with its recordkeeping obligations under this Order;
and (d) whether there is any evidence of the investment adviser
engaging in ``dumping'' in connection with its reliance on this
Order.\4\ The investment adviser's chief compliance officer will
document the frequency and results of such monitoring and testing, and
the investment adviser will maintain and preserve such documentation in
an easily accessible place for a period of not less than five years,
the first two years in an appropriate office of the investment adviser,
and be available for inspection by the staff of the Commission.
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\4\ See Report of the Securities and Exchange Commission,
Investment Trusts and Investment Companies, H.R. Doc. No. 279, 76th
Cong., 2d Sess., pt. 3, at 2581, 2589 (1939); Hearings on S. 3580
Before a Subcommittee of the Commission on Banking and Currency,
76th Cong., 3d Sess. 209, 212-23 (1940); Hearings on S. 3580 Before
the Subcomm. of the Comm. on Banking and Currency, 76th Cong., 3d
Sess. 322 (1940).
By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2016-29297 Filed 12-6-16; 8:45 am]
BILLING CODE 8011-01-P