AIMR

Association for Investment Management and Research



RESPONSE OF THE OFFICE OF CHIEF COUNSEL

DIVISION OF INVESTMENT MANAGEMENT File No. 132-3





Your letter of December 3, 1996 requests our assurance that we would not

recommend enforcement action to the Commission if, in presenting performance

information, an investment adviser ("Presenting Adviser") that seeks to comply with

certain minimum performance presentation standards ("PPS") developed by the

Association for Investment Management and Research ("AIMR") advertises

performance as follows: 5



(1) The Presenting Adviser provides gross and net-of-fee performance for

composites of the Presenting Adviser's accounts that include mutual fund

accounts, provided that the gross and net performance are both presented

with equal prominence in a format designed to facilitate ease of

comparison and are accompanied by appropriate disclosure explaining

how the performance figures were calculated and not identifying any

specific mutual fund included within the composite.



(2) The Presenting Adviser includes the performance of both its non-wrap fee

accounts and wrap fee accounts in the same composite, and calculates

the composite performance by deducting from the performance of non-

wrap fee accounts a "model fee" equal to the highest fee charged to a

wrap fee account in the composite.



(3) The Presenting Adviser calculates net-of-fee performance for an account

managed by a number of advisers including the Presenting Adviser

("multi-manager accounts"), by deducting from the performance of that

portion of the account managed by the Presenting Adviser those fees

related to the management of that portion by the Presenting Adviser, such

as transaction costs and all fees paid to the Presenting Adviser or any of

its affiliates.









5 A I M R is a g l o b a l n o n - p r o fit m e m b e r s h i p o r g a n i z a ti o n c o n sisti n g o f i n v e st m e n t a n a l y sts, p o rtf o li o m a n a g e r s a n d

oth er in v est m e nt d e cisio n m a k ers. T h e st a ff v i e w s e x p r e s s e d i n t h is l e tt e r a r e n o t c o n d iti o n e d i n a n y w a y o n a n a d v is e r

c o m p l y i n g w it h A I M R 's P P S . I n a d d iti o n , t h e st a ff v i e w s i n c l u d e d i n t h is l e tt e r a r e i n n o w a y i n t e n d e d t o i n d i c a t e a n y

p o siti o n w it h r e s p e ct t o A I M R 's P P S g e n e r a ll y

.

1. The Presentation of Composites Including Mutual Fund and Non-Mutual

Fund Accounts



You first inquire whether a Presenting Adviser may provide, in advertisements

and one-on-one presentations, both gross- and net-of-fee performance results for

composites 6 that include both mutual funds and non-mutual fund accounts. Specifically,

you represent that a Presenting Adviser would display both gross and net performance

results with equal prominence and in a format designed to facilitate ease of comparison

of the gross and net results. You also represent that these results would be

accompanied by disclosure explaining how the performance figures were calculated. 7

Finally, to avoid any inference that the presentation is a promotion or advertisement for

a particular mutual fund, you state that this disclosure will not identify any specific

mutual fund included within the composite.



Section 206(4) of the Investment Advisers Act of 1940 ("Advisers Act") prohibits

any act, practice or course of business that the Commission, by rule, defines as

fraudulent, deceptive or manipulative. Rule 206(4)-1(a)(5) under the Advisers Act

provides that it is a fraudulent, deceptive or manipulative act for any investment adviser

to distribute, directly or indirectly, any advertisement that contains any untrue statement

of a material fact or that is otherwise false or misleading. In Clover Capital

Management, Inc. (pub. avail. Oct. 28, 1986) ("Clover Capital"), the staff interpreted

Rule 206(4)-1(a)(5) to prohibit advertisements that include performance results that do

not reflect the deduction of advisory fees, brokerage commissions, and any other

expenses that a client would have paid or actually paid. 8

6 Y o u s t a t e th at a b asic c o m p o n e nt of A I M R 's P P S is t h e u s e o f c o m p o sit e s i n i n v e st m e n t p e rf o r m a n c e p r e s e n t a ti o n s.

Y o u d efin e a c o m p o sit e a s a n a g g r e g a ti o n i n t o a si n g l e p e f o r m a n c e p r e s e n t a ti o n o f p o rtf o li o s o r a s s e t c l a s s e s t h a t a r e

m a n a g e d w it h a si m il a r str a t e g y o r i n v e st m e n t o b j e c ti v e . Y o u r e p r e s e n t t h a t, u n d e r t h e A I M R st a n d a r d s, a ll f e e - p a y i n g

d is c r e ti o n a r y p o rtf o li o s m u st b e i n c l u d e d i n o n e o r m o r e o f a n a d v is e r's c o m p o s it e s. W e n o t e t h a t t h e s t a ff h a s t a k e n t h e

p o siti o n t h a t a n a d viser m a y c h o o se to e x clu d e fr o m a c o m p o sit e c e rt a i n si m il a rl y m a n a g e d a c c o u n ts, s o l o n g a s d o i n g s o

w o uld n ot c a u s e t h e c o m p o sit e p e rf o r m a n c e t o b e m isl e a d i n g . N i c h o l a s - A p p l e g a t e M u t u a l F u n d s ( p u b . a v a il. A u g . 6 ,

1 9 9 6

.

7T h e d is c l o s u r e a c c o m p a n y i n g g r o s s - o f-f e e p e rf o r m a n c e w o u l d s p e c ifi c a ll y st a t e t h a t t h e p e rf o r m a n c e d o e s n o t r e fl e c t

th e p a y m e nt of in v est m e nt a d vis ory fe es a n d oth er e x p e n ses th at w o uld b e in c urre d in th e m a n a g e m e nt of a n a c c o u nt

.

8 T h e s t a f f t o o k t h e p o s i t i o n t h a t t h e p r e s e n t a t i o n o f g r o s s p e r f o r m a n c e d a t a a l o n e m a y b e f a ls e a n d m isl e a d i n g b e c a u s e it

c o u l d i m p l y , o r c a u s e a p o t e n ti a l a d v is o r y c li e n t r e c e i v i n g t h e d a t a t o i n f e r, s o m e t h i n g a b o u t t h e a d v is e r's c o m p e t e n c e o r

a b o u t f u t u r e i n v e st m e n t r e s u lts t h a t w a s n o t tr u e. T h e C o m m is si o n s u b s e q u e n tl y c o m m e n c e d s e v e r a l e n f o r c e m e n t a c ti o n s

a g a i n st i n v e st m e n t a d v is e r s t h a t a d v e rtis e d o n l y g r o s s - o f-f e e p e rf o r m a n c e. S e e I n t h e M a tt e r o f H a z e l B . C a n h a m , A d v is e r s

A c t R e l. N o . 1 3 8 6 ( A d m i n . P r o c . F il e N o . 3 - 8 0 6 7 ) ( S e p . 3 0 , 1 9 9 3 ); I n t h e M a tt e r o f E ri c S . E m o r y a n d R e n a is s a n c e

A d v i s o r s, I n c ., A d v i s e r s A c t R e l. N o . 1 2 8 3 ( A d m i n . P r o c . F il e N o . 3 - 7 5 3 0 ) ( J u l y 2 2 , 1 9 9 1 ); I n t h e M a tt e r o f M a k r o d

I n v e s t m e n t A s s o c i a t e s I n c ., J o h n T h o m a s O ' D o n n e ll, A d v i s e r s A c t R e l. N o . 1 1 7 6 ( A d m i n . P r o c . F il e N o . 3 - 7 2 2 0 ) ( J u l y 3 ,

1 9 8 9 ); I n t h e M a tt e r o f H a r v e s t F i n a n c i a l G r o u p , I n c . a n d S t e p h e n S . D u k l e w s k i, J r., A d v i s e r s A c t R e l. N o . 1 1 5 5 ( A d m i n .

The first issue presented by your letter is whether an investment adviser may

distribute an advertisement that presents both gross- and net-of-fee performance

information for a composite of the adviser's accounts. You maintain that an adviser

would not violate Rule 206(4)-1(a)(5) if it distributes an advertisement presenting gross

and net performance with equal prominence and in a format designed to facilitate ease

of comparison, provided that the advertisement contains sufficient disclosure to ensure

that the material presented is not misleading. The staff agrees that such an

advertisement would not be prohibited by the Rule. 9



The second issue raised by your letter is whether the presentation of a gross-of-

fee composite that includes the performance of one or more mutual funds managed by

the adviser would be subject to the requirements governing investment company

advertisements and sales literature. Under the Securities Act of 1933 (Rule 482(e)(3))

and the Investment Company Act (Rule 34b-1) 10 , any performance information in

mutual fund advertisements or sales literature must include standardized total return

calculated under a formula that requires the deduction of all fees and expenses paid by

the fund. You represent, however, that the disclosure accompanying the composite

would not identify any specific mutual fund that is included in the composite. In our

view, as long as an advertisement for investment advisory services does not include an

explicit or implicit reference to a particular fund, it would not be an advertisement for a

fund. 11 Therefore, in our view the standardized performance requirements of Rule 482

and Rule 34b-1 referenced above would not apply to such an advertisement.





P r o c. F il e N o . 3 - 7 1 4 6 ) ( F e b . 2 1 , 1 9 8 9 ); I n t h e M a tt e r o f M a n a g e d A d v is o r y S e r v i c e s, I n c. a n d H e n r y L . C h is e a, A d v is e r s

A c t R e l. N o . 1 1 4 8 ( A d m i n . P r o c . F il e N o . 3 - 7 1 0 7 ) ( D e c . 2 7 , 1 9 8 8 )

.

9 W e n ote th at th e staff h a s p r e v i o u s l y t a k e n t h e p o s iti o n t h a t a n a d v is e r's p r e s e n t a ti o n o f g r o s s - o f-f e e p e rf o r m a n c e r e s u lts

w it h o u t n e t- o f-f e e r e s u lts w o u l d n o t b e m isl e a d i n g if m a d e o n l y i n o n e - o n - o n e p r e s e n t a ti o n s t o s o p h isti c a t e d i n v e st o r s,

p r o vid e d th at s u ffi cie nt d is c l o s u r e s a r e m a d e a n d t h e i n v e st o r s a r e g i v e n t h e o p p o rt u n it y t o i n q u ir e a b o u t f e e s. I n v e st m e n t

C o m p a n y I n stit u t e (p u b. a v a il. S e p t. 2 3 , 1 9 8 8 )

.

1 0 R u l e 3 4 b - 1 u n d e r t h e I n v e st m e n t C o m p a n y A c t p r o v i d e s t h a t s a l e s lit e r a t u r e f o r o p e n - e n d f u n d s o t h e r t h a n m o n e y

m a r k e t f u n d s, c o n t a i n i n g p e rf o r m a n c e i n f o r m a ti o n is d e e m e d t o b e m isl e a d i n g u n l e s s it i n c l u d e s, a m o n g o t h e r t h i n g s, t h e

t o t a l r e t u r n c a l c u l a ti o n s r e q u ir e d u n d e r R u l e 4 8 2 ( e )( 3 ). S e e a ls o F o r m N - 1 A , It e m 2 2 ( b ). R u l e 3 4 b - 1 w a s a d o p t e d

p u r s u a n t t o S e c ti o n 3 4 ( b ) o f t h e I n v e st m e n t C o m p a n y A c t, w h i c h p r o h i b its p e r s o n s fr o m m a k i n g a n y u n tr u e st a t e m e n t o f

m a t e ri a l f a c t i n d o c u m e n ts r e l a ti n g t o i n v e st m e n t c o m p a n i e s t h a t a r e r e q u ir e d t o b e fil e d w it h t h e C o m m is si o n .

A d v e rtis e m e n ts a n d s a l e s lit e r a t u r e u s e d b y a n o p e n - e n d i n v e st m e n t c o m p a n y o r its u n d e r w rit e r m u st b e fil e d , o r b e

d e e m e d fil e d , w it h t h e C o m m is si o n p u r s u a n t t o S e c ti o n 2 4 ( b ) o f, o r R u l e 2 4 b - 3 u n d e r, t h e I n v e st m e n t C o m a p n y A c t

.

1 1 C f . R u l e 1 3 5 a u n d e r t h e S e c u r i t i e s A c t o f 1 9 3 3 , w h i c h p r o v i d e s t h a t g e n e ri c a d v e rtis e m e n ts t h a t d o n o t s p e c ifi c a ll y

r e f e r b y n a m e t o t h e s e c u riti e s o f a p a rti c u l a r i n v e st m e n t c o m p a n y o r t o t h e i n v e st m e n t c o m p a n y its e lf w ill n o t b e d e e m e d

o ff e r s o f t h o s e i n v e st m e n t c o m p a n y s e c u riti e s if c e rt a i n o t h e r c o n d iti o n s a r e m e t.

2. The Presentation of Performance of a Composite Including Wrap Fee and

Non-Wrap Fee Accounts



You propose that Presenting Advisers deduct from non-wrap fee accounts that

are included with wrap fee accounts in a composite, a "model fee" equal to the highest

fee charged to a wrap fee account in the composite. You represent that the highest fee

charged to a wrap fee account would be higher than any fee charged to a non-wrap fee

account included in the composite. 12



In such a case, the staff would not consider it a fraudulent or deceptive practice

under Rule 206(4)-1 if an adviser presents net performance that reflects the deduction

of actual fees from wrap fee accounts and the deduction of a model fee, equal to the

highest fee charged to a wrap fee account, from non-wrap fee accounts, provided that

the advertisement contains sufficient disclosure to ensure that the information presented

is not misleading. 13



3. The Calculation of Net Performance Results



You request our views regarding which fees a Presenting Adviser must deduct in

calculating the net-of-fee performance of a "multi-manager" account. 14 You propose

that, for purposes of calculating the net-of-fee performance of an adviser's portion of a

multi-manager account included in a composite, a Presenting Adviser should be

required to deduct only those fees related to its management of the account. You

represent that performance results would be accompanied by disclosure that specifically

identifies the types of fees deducted.



In Clover Capital, the staff took the position that performance information in an

advertisement should reflect the deduction of "advisory fees, brokerage or other

commissions, and any other expense that a client would have paid or actually paid". In

Investment Company Institute (pub. avail. July 24, 1987), the staff took the position that

custodial fees need not be deducted from net performance, and stated that

"[i]nformation about the fees the adviser charged clients in the sample is material to



1 2 Y o u a l s o r e p r e s e n t t h a t t h e p e r f o r m a n c e r e s u l t s w o u l d b e a c c o m p a n i e d b y a s c h e d u l e d e t a ili n g t h e a c t u a l f e e s

a p p li c a b l e t o w r a p f e e a c c o u n ts

.

1 3 T h e st a ff a d d r e s s e d a si m il a r is s u e i n J. P . M o r g a n I n v e st m e n t M a n a g e m e n t, I n c . ( p u b . a v a il. M a y 7 , 1 9 9 6 ). I n t h a t

le tt e r, t h e st a ff t o o k t h e p o siti o n t h a t a n a d v is e r m a y a d v e rtis e p e rf o r m a n c e r e fl e c ti n g t h e d e d u c ti o n o f a m o d e l f e e w h e n

d o i n g s o w o u l d r e s u lt i n p e rf o r m a n c e fi g u r e s t h a t a r e n o h i g h e r t h a n t h o s e r e fl e c ti n g t h e d e d u c ti o n o f a c t u a l f e e s.



F o r t h is d is c u s si o n , w e d e fi n e a m u lti- m a n a g e r a c c o u n t a s a a si n g l e a c c o u n t i n w h i c h d iff e r e n t a d v is o r y fir m s e a c h

1 4



m a n a g e a s e p a r a t e p o r ti o n o f t h e a c c o u n t's a s s e t s .

evaluating the investment experience of those clients and the adviser's competence. . .

."



In the staff's view the fees relevant to an evaluation of the investment experience

of the adviser's clients and of the adviser's competence are those fees or charges

related to the adviser's management of the account. The staff believes that, at a

minimum, these fees and charges include: 1) all transaction costs; and 2) all fees or

charges paid to the adviser or an affiliate of the adviser.



Our position with respect to the calculation of net performance is not limited to

the performance of multi-manager accounts. The net-of-fee performance of any

investment advisory account may be calculated by deducting only the fees described

above.



4. Conclusion



We would not recommend enforcement action to the Commission if an adviser

includes performance information in advertisements and one-on-one presentations

calculated and set forth in the manner described above. This position is based on the

facts and representations set forth in your letter and described above. You should note

that any different facts or representations might require a different conclusion.







Eileen M. Smiley

Senior Counsel