Investment Management, Hedge Funds
and Alternative Investment Alert
May 2007
Authors:
Michael S. Caccese
+1.617.261.3133
michael.caccese@klgates.com
Rebecca O’Brien Radford
+1.617.261.3244
rebecca.radford@klgates.com
J. Jordan Scott
+1.617.951.9084
jordan.scott@klgates.com
K&L Gates comprises approximately
1,400 lawyers in 22 offices located in
North America, Europe and Asia, and
represents capital markets participants,
entrepreneurs, growth and middle market
companies, leading FORTUNE 100 and
FTSE 100 global corporations and public
sector entities. For more information,
please visit www.klgates.com.
www.klgates.com
Sponsors of SMA Programs Granted Some
Relief From Rule 10b-10(a)
On April 30, 2007, the SEC staff granted exemptive relief1 providing guidance in response
to a request from Wachovia Securities, LLC and certain of its affiliates, each of which is
a registered broker-dealer under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and a registered investment adviser under the Investment Advisers Act
of 1940, as amended (the “Advisers Act”). Importantly, the SEC staff stated in the Order
that it will extend such relief to all firms that are dually registered as broker-dealers and
investment advisers (“Dual Registrants”) offering “wrap fee”/separately managed account
programs (each, a “Program”) in which they act as a fiduciary in managing their clients’
funds on a discretionary basis.
Wachovia requested the SEC staff’s views under Rule 10b-10(a) of the Exchange Act
concerning the sending of a periodic statement to clients in lieu of a trade-by-trade
confirmation in a Program. In a Program, clients generally receive portfolio management,
execution, asset allocation and administration services for one asset-based management
fee.
In its Programs, Wachovia acts as an investment adviser and executing broker for securities
transactions. Wachovia explained that because its Program clients retain Wachovia to
act as a fiduciary to manage funds on a discretionary basis, some clients do not want to
receive immediate confirmation statements on a trade-by-trade basis. Instead, such clients
are willing to expressly instruct Wachovia in writing not to send immediate confirmation
statements.
The SEC staff had previously provided exemptive relief from the trade-by-trade confirmation
delivery requirements of Rule 10b-10(a) to Dual Registrants. The SEC staff stated that all
Dual Registrants offering Programs in which they act as a fiduciary in managing their
clients’ funds on a discretionary basis may provide quarterly statements instead of tradeby-trade confirmations, provided that the following conditions are satisfied:
„
Dual Registrants must provide all Program clients, upon opening an account and
annually thereafter, a brochure describing the Program in accordance with Rule 204-3
of the Advisers Act.
„
Dual Registrants must develop a form of written or electronic consent that must be
prominent, clear and easily understandable for Program clients who request not to
receive trade-by-trade confirmations and, in lieu thereof, receive a periodic statement
that contains the same information for each transaction that would have appeared in the
trade-by-trade confirmation.
„
Program clients electing to receive periodic statements in lieu of trade-by-trade
confirmations must have the ability to request, for no additional cost, trade-by-trade
confirmations for any transaction since the date of the last periodic statement, as well
1
See Wachovia Securities, LLC, SEC Exemptive Order dated April 30, 2007 (the “Order”), available
at http://www.sec.gov/divisions/marketreg/mr-noaction/2007/wachovia043007-10b-10.pdf.
Investment Management, Hedge Funds
and Alternative Investments Alert
as for all subsequent transactions and previous
transactions effected for up to a one-year period
preceding their last periodic statement.
„
Dual Registrants must send all information
required by Rule 10b-10(a) to Program clients in
a periodic statement on at least a quarterly basis.
„
Program clients must have access to the Dual
Registrants’ website to view, in no event later than
the next business day after trade date (T+1), all
information required by Rule 10b-10(a). Program
clients must also be able to obtain all such
information either by telephoning their account
representative or by requesting the trade-by-trade
confirmation for a particular transaction.
„
Dual Registrants must continue to generate and
send trade-by-trade confirmations to their Program
clients not electing to receive periodic statements
in lieu of trade-by-trade confirmations.
„
Dual Registrants must continue to generate and
retain, in accordance with Exchange Act Rules
17a-3 and 17a-4, trade-by-trade confirmations
for Program clients who elect to receive
periodic statements in lieu of trade-by-trade
confirmations.
„
Dual Registrants must state how Program clients
may elect to receive periodic statements. Dual
Registrants must inform existing and new Program
clients about their ability to receive confirmations
on a trade-by-trade basis or in periodic statements,
but may not suggest which choice is better.
„
Consistent with the “wrap fee” concept of an
all-inclusive fee, except in rare circumstances
that would have been previously disclosed to
Program clients, Dual Registrants should not
charge Program clients a mark-up, mark-down
or commission for effecting transactions, and no
Program client should be charged a sales load
in connection with transactions in mutual fund
shares.
In sum, the Order permits entities dually registered
as broker-dealers and investment advisers to send
periodic statements to clients in “wrap fee”/separately
managed account programs in lieu of trade-by-trade
confirmations.
.
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LLP qualified in Delaware and maintaining offices throughout the U.S., in Berlin, and in Beijing (Kirkpatrick & Lockhart Preston Gates Ellis LLP
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K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners in each entity is available
for inspection at any K&L Gates office.
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