October 27, 1997
Mr. Paul D. Coury
The Coury Financial Group
USX Tower, Suite 3040
600 Grant Street
Pittsburgh, PA 15219
Dear Mr. Coury:
You have asked for an opinion as to whether a properly registered Investment Adviser, who is also registered with a broker/dealer as a Series 6 Registered Representative, may provide asset allocation recommendations to prospective clients with regard to a "wrap fee" separately managed account program that includes stocks and bonds, as opposed to a "wrap fee" mutual fund program.
From your letters of September 17 and 23, and our conversations of September 22 and October 13, I understand the facts to be as follows:
You are an independent investment adviser registered in Pennsylvania, as well as a Series 6 registered representative of FSC Securities Corporation (FSC). As part of your investment advisory business, you would like to recommend to your clients the ability to participate in an "asset allocation program." That program would be managed and traded by an unrelated money manager. You may engage a "third party" broker/dealer to perform due diligence with regard to the money manager. The prospective client would give the money manager full discretion. The third party broker/dealer would share with you a "wrap fee" from the client for asset management, accounting, and reporting. Neither of you would be involved with execution of transactions in the program or receive commissions on those transactions; rather, the money manager would handle those transactions.
At your suggestion, I spoke with [broker/dealer] which I understand you have considered using as a third party broker/dealer. [Broker/dealer] explained that [broker/dealer] has developed a proprietary program that includes the use of a client questionnaire, a software program, and research done by [broker/dealer]’s staff. After reviewing this information, you and [broker/dealer] then would refer the client to one of the money managers with which [broker/dealer] has a relationship and which manages a portfolio of securities considered to be appropriate for your client, such as large capitalization, international, and so forth. The client would invest a sum of money with the money manager to purchase shares of companies in its portfolio. For this service, the client would pay an annual fee (such as 2% of assets under management), which would be divided among [broker/dealer], the money manager, and yourself.
With these facts in mind, I have reviewed Notices to Members (NTM) 94-44 and 96-33, which explained the application of Rules 3030 and 3040 (formerly Article III, Sections 43 and 40) to the investment advisory activities of registered representatives. It appears that the arrangement you contemplate is similar to that described as scenario number 3 in NTM 94-44, at p. 247. As in that scenario, you would share in a fee received from the client for management, accounting, and reporting; and you would receive no part of any transaction fee. Your situation is slightly different, in that a third party is interposed between yourself and the asset manager. I do not believe this would change the analysis set forth in NTM 94-44. Therefore, your activities would be subject to the notification requirements of Rule 3030 rather than the requirements of Rule 3040. This would require you to provide prompt written notice to FSC of your planned outside business activity, with such notice to be in the form required by FSC.
You also mentioned in our telephone conversations that FSC questioned whether you must be registered under Series 7, since the underlying transactions will be in stocks and bonds rather than in mutual funds. NTM 96-33 states that a limited registered representative may not execute transactions in securities not covered by his or her registration. You have indicated that you will neither (i) engage in the purchase or sale of individual stocks or bonds, nor (ii) receive a fee based on the execution of such purchases or sales. Therefore, it does not appear that Series 7 registration is required for the planned activity.
Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the Board of Directors of NASD Regulation. This letter responds only to the issues that you have raised, based on the facts as described, and does not address any other rule or interpretation of the Association, or all the possible regulatory and legal issues involved.
Very truly yours,
Jean I. Feeney
cc: John Ramsay, Deputy General Counsel