A wrap fee program in which a registered representative/investment adviser neither receives transaction fees nor is involved with the execution of securities transactions would be subject to NASD Rule 3030, rather than Rule 3040.
July 30, 1997
Webster E. Janssen
Janssen Financial Services
P.O. Box 275
Litchfield, CT 06759
Re: Clarification of NASD Notice to Members 96-33
Dear Mr. Janssen:
You have written to me seeking clarification of NASD Notice to Members 96-33 as it may apply to "wrap fee" programs and a member firm's obligation to supervise the involvement of a registered representative/investment adviser ("RR/IA") in such activities. You pointed out that Notice to Members 94-44 indicated that wrap fee program activity would be subject to NASD Rule 3030 rather than Rule 3040. You have asked whether anything has changed since the issuance of Notice to Members 94-44 to require member supervision of a RR/IA's wrap fee program activity.
As described in Notice to Members 94-44, a wrap fee program is one in which the RR/IA receives a portion of the "wrap fee" for asset management, accounting, and reporting, but does not receive any transaction fee. Under the program, the RR/IA is not involved with the execution of the portfolio transactions, which are handled through another broker/dealer firm. Notice to Members 94-44 stated that, under this scenario, the wrap fee program activity would be subject to Rule 3030 rather than Rule 3040. See Notice to Members 94-44, Paragraph 3, p. 247.
In answer to your question, Notice to Members 96-33 does not change this analysis to require member supervision of wrap fee program activity under the facts as described in Notice to Members 94-44 and summarized above.
Very truly yours,
Mary N. Revell