SEC Grants Industrywide Exemption from Confirmation Delivery Requirements for Internally Managed, Discrectionary Programs

PDF version   On April 30, 2007, the SEC granted an industrywide exemption from the confirmation delivery requirements of Rule 10b-10 under the Securities Exchange Act of 1934 to all dually registered broker-dealers and investment advisers (Dual Registrants) offering programs in which the Dual Registrant acts as a fiduciary in managing its clients’ accounts on a discretionary basis (Programs). [1] The exemption followed a 2005 clarification to the scope of industrywide relief granted to the Money Management Institute and the Securities Industry Association (now the Securities Industry and Financial Markets Association) in 1999. [2]

The SEC’s exemption is conditioned upon the following:

1. The Dual Registrant must provide all Program clients, at or prior to account opening, and at least annually thereafter offer to provide, a brochure describing the products, services, and fees of the Program, in accordance with Rule 204-3 under the Investment Advisers Act of 1940.
2. The Dual Registrant must develop a form of written or electronic consent that is 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 that would have been in the trade-by-trade confirmation for each transaction. New Program clients may elect to receive a periodic statement in lieu of trade-by-trade confirmations by initialing a separate signature line specifically providing for such consent (or by executing a separate electronic consent to receive periodic statements in lieu of trade-by-trade confirmations), contained in the client’s account opening documentation.
3. Program clients electing not to receive trade-by-trade confirmations may later change their minds and request, for no additional cost, trade-by-trade confirmations for any transaction since the date of the last periodic statement, as well as for all subsequent transactions. The Dual Registrant must would also inform its Program clients that they may request, for no additional fee, trade-by-trade confirmations for previous transactions effected for up to a one-year period preceding the last periodic statement.
4. The Dual Registrant must send all information required by Rule 10b-10 to Program clients in a periodic statement on at least a quarterly basis.
5. Program clients must have access to an Internet website on which they are able to view, in no event later than the next business day after trade date (T+1), all information required by Rule 10b-10. Program Clients also must be able to obtain all information required by Rule 10b-10 either by telephoning their account representative or by requesting the trade-by-trade confirmation for the particular transaction.
6. The Dual Registrant must continue to generate and send trade-by-trade confirmations to those Program clients who do not elect to receive periodic statements in lieu of trade-by-trade confirmations.
7. The Dual Registrant 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.
8. The Dual Registrant may not require or request that its Program clients elect not to receive trade-by-trade confirmations, but may make information available on how such clients could make such an election. Dual Registrant client communications may 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. Such client communications also may inform Program clients that, if interested, they should contact a Dual Registrant representative to obtain more information or to obtain a copy of a written or electronic consent to request a periodic statement in lieu of trade-by-trade confirmations. These client communications may not suggest that such an election is required for Program accounts or that the client will incur additional costs if he or she does not elect to receive periodic statements in lieu of trade-by-trade confirmations.
9. Consistent with the wrap-fee program concept of an all-inclusive fee, except in rare circumstances that would have been previously disclosed to Program Clients, the Dual Registrant may not charge Program clients a mark-up, mark-down or commission for effecting transactions, and no Program client may be charged a sales load in connection with transactions in mutual fund shares. [3]

View the SEC Exemption.

Securities Industry FYI is a service of the Broker-Dealer Practice of Morgan Lewis. If you have any questions concerning these important legal developments, please contact any of the following Morgan Lewis attorneys:

Steven W. Stone
John V. Ayanian
Jack P. Drogin
Theodore R. Lazo

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Footnotes

1. See Letter to Morgan, Lewis & Bockius re: Request for Exemption from Rule 10b-10(a) for Wachovia Securities (April 30, 2007).

2. In an April 21, 2005 letter to Morgan Keegan & Co., Inc., the SEC staff stated that relief granted to the Money Management Institute and the Securities Industry Association is available only to broker-dealer sponsors that do not also serve as investment advisers for a wrap-fee program.

3. In the event the Dual Registrant acts as principal in a transaction or charges a commission for effecting a transaction or a Program Client is charged a sales load in connection with a mutual fund transaction, the broker-dealer would send a trade-by-trade confirmation in connection with the transaction.