SEC Grants Industrywide Relief from Confirmation Disclosure and Delivery Requirements

PDF version   On May 24, 2007, for the second time in less than four weeks, the SEC granted an industrywide exemption relief 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 wrap-fee programs in which the Dual Registrant acts as fiduciary in managing its clients’ accounts on a discretionary basis (Programs). [1] The exemption permits Dual Registrants to omit from periodic statements sent to Program clients in lieu of trade-by-trade confirmations information that previously could be omitted from periodic statements sent to Program clients where the investment adviser is a separate legal entity from the broker-dealer sponsor of the wrap-fee-program (BD Sponsor). In addition, the SEC staff granted industrywide no-action relief, permitting BD Sponsors to obtain the consent of Program clients to receive periodic statements in lieu of trade-by-trade confirmations without obtaining a separate signature, provided specified conditions are met.

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, or SIFMA) in 1999 (the MMI/SIA Letter), [2] which had permitted BD Sponsors to omit certain information required by Rule 10b-10(a) from periodic statements sent to Program clients in lieu of trade-by-trade confirmations, provided specified conditions were met. [3]

In its most recent exemption, the SEC granted industrywide relief, permitting Dual Registrants to omit from the periodic statements sent to Program clients the information that BD Sponsors already were permitted to omit from periodic statements under the MMI/SIA Letter, where the BD Sponsor was a separate legal entity from the investment adviser. The staff provided the following conditions for the relief:

1. The Dual Registrant would provide to 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 Advisers Act Rule 204-3.
2. The Dual Registrant would develop a form of written or electronic consent that would be prominent, clear, and easily understandable for Program clients who request not to receive trade-by-trade confirmations and, in lieu thereof, to receive a periodic statement that contains the information required by Rule 10b-10, subject to the relief described below.
3. Program clients electing not to receive trade-by-trade confirmations could later change their minds and request, for no additional cost, trade-by-trade confirmations for any transactions since the date of the last periodic statement, as well as for all subsequent transactions. The Dual Registrant would also inform Program clients that they could request, for no additional fee, trade-by-trade confirmations for previous transactions effected for up to one year preceding the last periodic statement.
4. The Dual Registrant would send all information required by Rule 10b-10 to electing Program clients in the periodic statement, except as described below.
   1. Rule 10b-10(a) requires a broker-dealer to disclose in writing the date of trade executions; rules of self-regulatory organizations require broker-dealers to disclose in writing the settlement date. [4] The Dual Registrant may elect not to disclose the trade date in periodic statements sent to customers, provided the Dual Registrant discloses the settlement date instead, clearly indicates that the date shown is the settlement date, and is consistent in disclosing the settlement date instead of the trade date.
   2. Where the Dual Registrant does not charge a mark-up, mark-down, or commission on brokerage transactions, the following items need not be disclosed: (i) that no mark-up, mark-down, or commission was charged; (ii) whether any additional remuneration was received from a third party; or (iii) whether payment for order flow was received in connection with the transaction.
   3. The Dual Registrant may elect not to disclose information about the redemption provisions of debt securities or information regarding the yield on asset-backed securities, as required by Rules 10b-10(a)(4) and 10b-10(a)(7), respectively, on the periodic statements.
   4. The Dual Registrant may elect not to disclose the fact that a debt security, other than a government security, is unrated by a nationally recognized statistical rating organization.
5. The Dual Registrant would 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.
6. The Dual Registrant would also 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.
7. The Dual Registrant would not require or request that Program clients elect not to receive trade-by-trade confirmations, but would make information available on how such clients could make such an election. Dual Registrant client communications would inform Program clients about their ability to receive confirmations on a trade-by-trade-basis or in periodic statements, but would not suggest which choice is better. Such client communications also would inform Program clients that, if interested, they should contact a registered 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 would not suggest that such an election is required for Program accounts or that the clients would incur additional costs if they did not elect to receive periodic statements in lieu of trade-by-trade confirmations.
8. With respect to the Program, clients would have access to the Dual Registrant’s website and would be able to view, in no event later than the next business day after the trade date (T + 1), all information required by Rule 10b-10, including the information to be omitted pursuant to condition 4 above. Program clients would also 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.
9. Dual Registrants sending statements on a quarterly basis would generally not charge Program clients a mark-up, mark-down, or commission for effecting transactions, and no Program client would be charged a sales load in connection with transactions in mutual fund shares. In the rare event that the Dual Registrant acted as principal in a transaction or charged a commission for effecting a transaction or a Program client was charged a sales load in connection with a mutual fund transaction, the Dual Registrant would send a trade-by-trade confirmation in connection with the transaction. This condition is limited to Dual Registrants sending quarterly statements in lieu of trade-by-trade confirmations only.

The SEC staff also granted industrywide no-action relief, permitting BD Sponsors relying on the MMI/SIA Letter, as well as Dual Registrants, to obtain client consent to receive a periodic statement in lieu of trade-by-trade confirmations by checking a box on the account application the client later signs, provided certain additional conditions are met. [5] The MMI/SIA Letter had required BD Sponsors to provide a second signature block on the account application, which the client would execute to demonstrate consent to periodic statements in lieu of trade-by-trade confirmations. Similar conditions were also required of Dual Registrants. In order to rely on this relief, BD Sponsors relying on the MMI/SIA Letter would have to meet each of the other conditions specified in that letter.

View SEC’s 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
Jack P. Drogin

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Footnotes

1. See Letter to Morgan, Lewis & Bockius LLP re: Request for Exemption from Rule 10b-10 for UBS Financial Services Inc. (May 24, 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 BD Sponsors that do not also serve as investment advisers for a wrap-fee program.

3. See Letter to Morgan, Lewis & Bockius LLP re: Money Management Institute/Securities Industry Association (Aug. 23, 1999).

4. See, e.g., NYSE Rule 409(f).

5. Under the no-action relief, Program clients would elect to receive from the Dual Registrant a monthly statement in lieu of trade-by-trade confirmations by checking a box on the client’s application or other account-opening documentation next to specific text indicating this election. Program clients would discuss their client account selections, delegations, and elections with their Dual Registrant’s registered representative; the registered representative would input this information into the Dual Registrant’s systems; and the application that reflected the selections, delegations, and elections made by the client would be generated. This application would be sent to the client for his or her signature. Only one client signature would be required. The client’s election to receive a monthly statement in lieu of trade-by-trade confirmations would appear prominently (such as through bolded text), including an explicit reference to the fact that the client elected not to receive trade-by-trade confirmations. Disclosures regarding the rights of clients electing to receive monthly statements in lieu of trade-by-trade confirmations would appear directly above the signature line of the application, with explicit reference to the section of the application in which this selection was made.