June 1, 1998
Our Ref. No. 98-171
International
Association for
Financial Planning
File No. 132-3
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT
MANAGEMENT
Your letter dated April 3, 1998 on behalf of the International Association for Financial
Planning ("IAFP") requests that we confirm that we would not recommend
enforcement action to the Commission under Rule 206(4)-3 under the Investment
Advisers Act of 1940 (the "Advisers Act") if IAFP engages in an advertising
arrangement and provides a referral program, as described in your letter.
Facts
You state that IAFP is a trade
association for financial planning professionals, most of whom are registered as
investment advisers. IAFP provides a referral program (the "Referral Program")
that promotes the use of the financial planning process to individuals and
engages in a national public awareness program promoting the use of professional
financial advisers (most of whom also are registered as investment advisers).
You state that individuals may contact the Referral Program through a
toll-free number or through IAFP's [*2] site on
the World Wide Web, and request the names of financial advisers in their
geographic area. When individuals contact IAFP seeking referrals to financial
advisers, they are asked some general questions to determine the subject areas
that they are interested in and the types of financial services that they are
seeking. n1 You state that the individuals are then given the names of up to
five advisers, located in their general geographic area, randomly selected based
upon the zip code of the individual seeking advice, the location of the advisers
in or near that zip code, and the subject/type of criteria that the individual
specifies. The individuals also receive a financial adviser information sheet
for each referred adviser, a blank financial adviser disclosure form for use in
interviewing advisers, and brochures about how to plan for their financial
future and how to select, and establish a good working relationship with, a
financial adviser. They also are provided with telephone numbers of various
regulatory agencies to check advisers' backgrounds and qualifications.
n1 You state that individuals are asked to identify general areas of
interest, including, but not limited to, comprehensive financial planning,
estate planning, and tax preparation, which information is used, along with
information about participating advisers, to match individuals with a selection
of advisers in their locales who practice in those financial areas. [*3]
You state that shortly after
sending an information package to an individual, IAFP notifies each adviser
whose name was provided that his name was given to that individual. n2 If an
individual asks, he has the option of having the referred adviser contact him by
mail only, or not at all. You state that this ends IAFP's involvement in the
process. n3 You assert that it is then up to the individual and the adviser to
pursue an adviser/client relationship.
n2 Telephone conversation between
Alison M. Fuller and James T. McIntyre on June 1, 1998.
n3 Id.
You state that if an individual accesses the Referral Program through
IAFP's Web site, the individual is sent the same information as one who uses the
toll-free telephone number. You state that later this year, the Web site will
become more interactive and individuals also will be able to call up an
unlimited list of financial advisers "on-line." Individuals also will be able to
view the financial adviser information sheet for each adviser on-line, and to
link to the adviser's own Web site, if the adviser has one, for further
information. Unless the individual does not want any information to go to an
adviser, an e-mail [*4]
automatically will be generated to the adviser after seven days, which
communicates certain information about the individual.
You state that a
financial adviser may participate in the Referral Program if the following
requirements are met: (1) the adviser is a member in good standing of IAFP's
Practitioner Division; (2) the adviser uses a financial planning process, which
means that the adviser places his client's interests above his own and follows a
process of defining goals, accessing the current situation, and developing
alternatives before making specific recommendations to clients; (3) the adviser
accurately completes a Financial Adviser Disclosure Form; (4) the adviser agrees
to abide by IAFP's Code of Professional Ethics; and (5) the adviser confirms
that he has not had any judgments rendered against him or been enjoined,
suspended or expelled from the securities industry in connection with the offer
and sale of securities or other financial products. n4
n4
Id.
You state that each participating financial adviser
pays IAFP $ 100 annually after the first year (which is free) to help offset the
cost of administering the Referral Program, including the national public
[*5]
awareness program and the toll-free number. n5 You represent that this charge is
a flat annual charge and is not in any way related to, or based upon, the number
of referrals received. You represent further that IAFP discloses the facts that
a fee is paid, and the amount of the fee, to individuals who receive advisers'
names through the Referral Program. n6
n5 Id.
n6 Id.
Analysis
Section 206(4) of the Advisers Act generally prohibits any investment
adviser from engaging in any act, practice or course of business that is
fraudulent, deceptive or manipulative, and requires the Commission by regulation
to define, and prescribe means reasonably designed to prevent, such acts,
practices and courses of business. Rule 206(4)-3 thereunder prohibits any
investment adviser that is required to be registered with the Commission from
paying a cash fee, directly or indirectly, to a solicitor with respect to
solicitation activities unless certain conditions imposed under the rule are
met. Paragraph (d)(1) of the rule defines "solicitor" as "any person who,
directly or indirectly, solicits any client for, or refers any client to, an
investment adviser." The Commission [*6] proposed
Rule 206(4)-3 in recognition of the inherent conflicts of interest which can be
present in arrangements in which an individual receives compensation, even on a
fully disclosed basis, for referring others to an investment adviser. n7
n7 See, e.g., Investment Advisers Act
Release No. 615 (Feb. 2, 1978) (proposing Rule 206(4)-3).
You assert
that Rule 206(4)-3 does not apply to the Referral Program because you believe
that the rule is designed to apply to individuals who seek out clients on behalf
of a specific investment adviser or advisers and refer clients to that adviser
or advisers. You represent that the Referral Program is an ancillary
communications program to help consumers locate qualified advisers in their
locales, not a solicitation of clients for specific advisers. You further
represent that individuals who access the Referral Program are provided with a
list of randomly selected advisers to choose from, rather than being steered
toward any one adviser. You state that the annual charge is a flat fee and is
not related to the number of referrals to or clients obtained by the adviser.
You further note that in Excellence in Advertising, Ltd. (pub. avail.
[*7] Dec. 15,
1986) ("EIA"), the staff agreed not to recommend enforcement action under Rule
206(4)-3 under the Advisers Act in connection with a program that you argue is
very similar to the Referral Program. You represent that only the following
three features of the Referral Program differ from the program described in EIA:
(1) in the Referral Program, the individual is asked to identify general areas
of interest; (2) IAFP sends a packet of educational information to the inquiring
consumer; and (3) IAFP uses advanced technology, such as the World Wide Web, to
permit individuals to access the Referral Program. You believe that those
features do not make the Referral Program materially different from the program
described in EIA.
Based on the facts and representations in your letter,
and without necessarily agreeing with your legal analysis, the staff would not
recommend enforcement action under Section 206(4) of the Advisers Act and Rule
206(4)-3 thereunder if investment advisers that are required to be registered
with the Commission under Section 203 of the Advisers Act participate in the
Referral Program and do not treat IAFP as a solicitor for purposes of the rule.
Because this position [*8] is based
on all of the facts and representations made in your letter, you should note
than any different facts or circumstances might require a different conclusion.
Further, this response only expresses our position with respect to enforcement
action, and does not express any legal conclusion on the issue presented. Having
stated our views on the subject in EIA, we will no longer respond to requests
for no-action relief regarding the status of referral programs under Rule
206(4)-3 under the Advisers Act unless they present novel or unique issues.
Alison M. Fuller
Attorney
INQUIRY-1: McINTYRE LAW FIRM, PLLC
ATTORNEYS AND COUNSELORS AT LAW
SUITE 1101
MADISON
OFFICE BUILDING
1155 FIFTEENTH STREET, NORTHWEST
WASHINGTON,
D.C. 20005
Telephone 202-659-3900
FAX 202-659-5763
Investment Advisers
Act of 1940
Rule 206(4)-3
April 3, 1998
Douglas J. Scheidt, Esq.
Associate Director and Chief Counsel
Division of Investment Management
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Re:
Request for No-Action Letter Regarding Solicitation Rule
Dear Mr. Scheidt:
We are writing on behalf of the International Association for Financial
Planning ("IAFP"), a Georgia-based [*9] trade association representing financial
advisers, requesting that the staff of the Division of Investment Management
(the "Staff") confirm that it will not recommend enforcement action to the
Securities and Exchange Commission (the "Commission") under Rule 206(4)-3,
promulgated under the Investment Advisers Act of 1940, with regard to the
advertising arrangement and referral program described herein.
I.
Statement of Facts
The IAFP n1 is a major trade
association for financial planning professionals, most of whom are registered as
investment advisers, which provides various information, education and benefit
services to its members. One of the services that it provides is a referral
program (the "Referral Program") which promotes the use of the financial
planning process to individuals and engages in a national public awareness
program promoting the use of professional financial advisers (most of whom are
also registered as investment advisers).
n1 The International Association for Financial
Planning (IAFP) is the largest and oldest membership association
representing the financial planning community, with 123 companies as members of
the Broker-Dealer Division and over 17,000 individual members nationwide.
[*10]
Pursuant to a national public awareness program, individuals can contact
the Referral Program through a toll-free number or through IAFP's site on the
World Wide Web, requesting the names of financial advisers in their geographical
area. When individuals call the IAFP seeking referral to financial advisers,
they are asked some general questions to determine the subject areas they are
interested in and the types of financial services they are seeking. The
individuals are then given the names of up to five advisers, located in their
general geographical area, randomly selected based upon the zip code of the
individual seeking advice, the location of the advisers in or near that zip
code, and the subject/type of criteria the individual specifies. The individuals
also receive from the Referral Program a financial adviser information sheet for
each referred adviser; n2 a blank financial adviser disclosure form for use in
interviewing advisers, if necessary; and brochures n3 about how to plan for
their financial future and how to select a financial adviser and establish a
good working relationship with one. They are also provided with telephone
numbers for various regulatory agencies to [*11] check advisers' backgrounds and
qualifications. If an individual asks, he has the option of having the referred
adviser contact him by mail only, or not at all.
n2 Contains
information on the background and qualifications of the advisers.
n3 The brochures are created by IAFP staff and provide general information
to educate consumers about the financial planning process, what it is and how
the process, with the help of a qualified financial adviser, can be used to help
them identify and achieve their personal financial objectives. Consumers are
also provided information on questions to ask and what to look for in selecting
a financial adviser.
Shortly after sending the information packages
to the individual, each adviser whose name was provided is notified that his or
her name was given out to the prospective client. This ends the Referral
Program's involvement in the process. It is up to the individual and the adviser
to pursue any adviser/client relationship.
Currently, if an individual
accesses the Referral Program through the site on the World Wide Web, the
individual is sent the same information as one who uses the toll-free telephone
number. Later this year, [*12] the
web site will become more interactive and an individual will be able to call up
an unlimited list of financial advisers "on-line." The individual will also be
able to view the financial adviser information sheet n4 for each adviser
on-line, as well as link to the adviser's own web site, if the adviser has one,
for further information. Unless the individual does not want any information to
go to an adviser, an e-mail will automatically be generated to the adviser after
seven days, which communicates the individual's name, address, telephone number,
e-mail address, and the answer the individual gave to the question, "Why are you
seeking a financial adviser?"
n4 Displays information on the
background and qualifications of the financial adviser.
An individual
financial adviser may participate in the Referral Program if the following
requirements are met:
1. The adviser is a member in good standing of the
IAFP's Practitioner Division.
2. The adviser uses a financial planning
process, which means the adviser places his client's interests above his own and
follows a process of defining goals, assessing the current situation, and
developing alternatives before making specific [*13] recommendations to clients.
3.
The adviser accurately completes a Financial Adviser Disclosure Form.
4.
The adviser agrees to abide by the IAFP's Code of Professional Ethics.
5. The adviser confirms that he has not had any judgments rendered
against him or been enjoined, suspended or expelled in connection with
securities or other financial products.
The participating financial
adviser pays $ 100 annually after the first year (which is free) to help offset
the cost of administering the Referral Program, including the national public
awareness program and the toll-free number. This charge is a flat annual charge
and is not in any way related to, or based upon, the number of referrals
received. The fact that a fee is paid and the amount of the fee is disclosed to
individuals who receive advisers' names through the Referral Program.
II. Legal Analysis
Rule 206(4)-3 (the "Solicitation
Rule") n5 promulgated pursuant to the Investment Advisers Act of 1940 n6 (the
"Act") makes it "unlawful for any investment adviser required to be registered
pursuant to Section 203 of the Act to pay a cash fee, directly or indirectly, to
a solicitor with respect to solicitation activities unless" [*14] they follow stringent procedures.
Solicitor is defined to mean "any person who, directly or indirectly, solicits
any client for, or refers any client to, an investment adviser." Client includes
any prospective clients.
n5 17 C.F.R. § 275.206(4)-3.
n6 15 USCA § 80b-1 et. seq.
It is our
opinion that Rule 206(4)-3 does not apply to the IAFP Referral Program. This
rule is obviously designed to apply to individuals who seek out clients on
behalf of a specific investment adviser or advisers and refer clients to that
adviser or advisers. The IAFP Referral Program is an ancillary communications
program to help consumers locate qualified financial advisers in their locales,
not a solicitation of clients for specific individual advisers. Individuals who
access the Referral Program are provided with a list of randomly selected
advisers to choose from, rather than being steered to any one adviser. The
Referral Program narrows the individual's search to a class of advisers whose
expertise matches the individual's needs. The individual exercises control over
whether to employ an adviser and over which adviser he will employ.
There is [*15] no
cost for participating in the Referral Program the first year, and after the
first year the fee, which is de minimis, only partially off-sets administrative
costs of the Referral Program. The annual charge is a flat fee and is not
related to the number of referrals to or clients obtained by the financial
adviser. The advisers are selected on a random basis. This is not a solicitation
as envisioned by the Rule because there is no solicitation involved. The fee
paid is not a cash payment as contemplated by the Rule because it is de minimis,
goes to help defray administrative costs and does not represent any "profit" to
the recipient. This is a program operated for the benefit of the public and
participating members and has a strong public education component.
The
SEC has considered whether the requirements of the Solicitation Rule apply to a
referral program which is very similar to the IAFP Referral Program. In a 1986
No Action Letter, n7 the SEC determined that the referral program established by
Excellence in Advertising, Limited (EIA) did not trigger provisions of Rule
206(4)-3. The IAFP Referral Program generally fits within the facts of the EIA
program; however, there are three [*16]
features of the IAFP Referral Program which differ from the EIA referral
program. First, the individual is asked to identify general areas of interest,
such as comprehensive financial planning, estate planning, tax preparation,
elder and long-term care planning, investment and asset management, charitable
giving, employee benefits and qualified retirement planning for businesses, cash
management and budgetary, etc., which are used along with information from the
participating advisers to provide consumers with a selection of advisers in
their locale who practice in those financial areas. The IAFP does not give
investment advice or attempt to ascertain the prospective customer's investment
objectives, but simply seeks to determine general areas in which the consumer is
interested in obtaining financial advice to assist in providing to the consumer
names of advisers whose areas of professional expertise appear to match the
consumer's expressed areas of interest. Second, the IAFP Referral Program sends
a packet of educational information to the inquiring consumer to enable the
consumer to make informed decisions in the selection of an investment adviser.
Third, the IAFP uses advanced [*17]
technology, the World Wide Web, to permit individuals to access the Referral
Program.
n7 Excellence in Advertising, Limited, SEC No Action
Letter, 1986 WL 67494 (SEC), (publicly available Dec. 15, 1986).
We feel
that these features are not materially different from the EIA program from a
legal perspective. In fact, these enhancements focus on the educational aspects
of the Referral Program, are designed to help the consumer make a more informed
and independent selection of an investment adviser, and take advantage of
advanced communication technology.
Although the definition of solicitor
is very broad, it is our judgment that it was not intended to include
organizations which advertise investment adviser services to the general public
as is done in the Referral Program and should not extend to the ancillary
communications services which the IAFP uses for the Referral Program. Therefore,
as in the EIA situation, the term "Solicitor" should not extend to the Referral
Program activities we have described.
Conclusion
For the above reasons, we submit that the term "Solicitor" as used in
Rule 206(4)-3 does not include a trade association which provides [*18] ancillary communications services for the
benefit of consumers, as well as its members. Accordingly, we respectfully
request that the Staff confirm to us that Rule 206(4)-3 does not apply to the
IAFP Referral Program as described in this letter and that the Staff will not
recommend an enforcement action to the Commission pursuant to such rule.
* * *
In accordance with Securities Act Release No.
6269, we have enclosed seven copies of this letter. If for any reason the Staff
does not concur with the views expressed herein, we respectfully request an
opportunity to confer with the Staff prior to any formal response to this
No-Action Request. If you have any questions regarding this No-Action Request,
please call me at (202) 659-3900.
Sincerely,
McINTYRE LAW FIRM, PLLC
James T. McIntyre
Counsel to the
International Association
for Financial
Planning