Michael K. Wolensky
                                 Ethan H. Cohen

                                 Kutak Rock LLP
                                 Suite 2100
                                 Peachtree Center South Tower
                                 225 Peachtree Street, N.E.
                                 Atlanta, Georgia 30303-1731
                                 (404) 222-4600

                                 January 7, 2002

                This Outline provides a general overview of Rule 206(4)-1, which defines the use

         of certain specific types of advertisements by advisers as fraudulent, deceptive or

         manipulative. It then focuses on performance advertising, including the presentation of

         model and actual performance results. This Outline also generally discusses the “one-on-

         one” exceptions to the limitations on presenting model and actual performance results, as

         well as the “portability” of performance of predecessor or prior advisers. Accompanying

         these discussions are the frequently encountered “lists” of conditions and disclosures the

         SEC Staff has presented in significant No-Action letters addressing the appropriateness

         (or inappropriateness) of advertising performance results. Finally, this Outline briefly

         discusses AIMR’s Performance Presentation Standards and its new Advertising


         A.     The General Rule ~
                206(4)-1 and the Five Categories of Prohibited “Advertising”

                Advertising by investment advisers is primarily regulated by the SEC pursuant to

         Section 206 of the Investment Advisers Act of 1940. Section 206, in general, prohibits

         an investment adviser from employing or engaging in fraudulent, deceptive or

         manipulative activities. Section 206(4) also, practically, gives the SEC rule making

         authority to prescribe means reasonably designed to prevent such acts, practices and

         courses of business.

                The SEC has adopted Rule 206(4)-1, which not only defines “advertising” but

         defines specifically—and in some cases more generally—prohibited types or categories

         of advertisements used by advisers.

                “Advertising” is broadly defined by subsection (b) of the Rule to include:

                        [A]ny notice, circular, letter or other written communication
                addressed to more than one person, or any notice or other announcement
                in any publication or by radio or television, which offers

                                (1)     Any analysis, report or publication concerning
                        securities, or which is to be used in making any determination as to
                        when to buy or sell any security, or which security to buy or sell,

                                (2)    Any graph, chart, formula, or other device to be
                        used in making any determination as to when to buy or sell any
                        security, or which security to buy or sell, or

                                (3)     Any other investment advisory service with regard
                        to securities.1

                The Rule also defines five types or categories of advertising that “shall constitute

         a fraudulent, deceptive, or manipulative act” if, directly or indirectly, published,

         circulated or distributed by an investment adviser (registered or required to be registered).

         Discussed in more detail below, subsections (1) – (4) of 206(4)-1(a) specifically define

         the four types of prohibited advertising and subsection (5) provides the ever-present

         “catchall” category of advertising prohibited by the Rule.

                        1.      Testimonials: Rule 206(4)-1(a)(1) prohibits advertising “[w]hich

                refers, directly or indirectly, to any testimonial of any kind concerning the

                investment adviser or concerning any advice, analysis, report or other service

                rendered by such investment adviser.”

                        The term “testimonial” itself is not defined by the Rule.          The term,

                however, as is generally understood in common parlance, contemplates

                statements by a former or present advisory client who favorably endorses the

       Electronic advertisements are also covered by and subject to the relevant provisions of the
Investment Advisers Act and its rules. See Securities Act Release No. 7288 (May 9, 1996).

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               adviser or refers to the client’s investment experience with the adviser or the

               adviser’s advisory services.

                      2.      Past Profitable Recommendations: Rule 206(4)-1(a)(2) prohibits,

               directly or indirectly, an adviser from advertising its past successful or

               “profitable” securities recommendations unless the adviser sets out or offers to

               furnish a list of all recommendations made by the adviser within at least the prior

               immediately preceding one-year period. The adviser’s list of recommendations in

               the advertisement, and such list if furnished separately, must present the following

               information and cautionary language:

                      (i)     the name of each security recommended;

                      (ii)    the date and nature of each such recommendation (e.g.,

                              whether to buy, sell or hold);

                      (iii)   the market price at that time;

                      (iv)    the price at which the recommendation was to be acted


                      (v)     the market price of each such security as of the most recent

                              practicable date; and

                      (vi)    the following “cautionary legend” must be contained on the

                              first page thereof in print or type as large as the largest print

                              or type used in the body of the text thereof: “it should not

                              be assumed that recommendations made in the future will

                              be profitable or will equal the performance of the securities

                              in this list.”

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                        Providing this information for extensive lists of recommendation may

                prove to be a difficult task. The SEC Staff has permitted advisers to provide

                information on a limited number of recommendations where (i) objective, non-

                performance based criteria are used to select the specific securities that it will list

                and discuss in the reports; (ii) the same selection criteria for each quarter for each

                particular investment category are used; (iii) the reports will not discuss, directly

                or indirectly, the amount of the profits or losses, realized or unrealized, of any of

                the specific securities; and (iv) the adviser will maintain the records described

                above, and, upon request, make them available for inspection by the Staff of the


                        3.     Selection Devices: Graphs, Charts and Formulas: Rule 206(4)-

                1(a)(3) also prohibits advertisements which represent, directly or indirectly, that

                any “graph, chart, formula or other device” presented can, “in and of itself,” be

                used in order to make decisions regarding investing in securities, unless the

                advertisement includes, “prominently,” a disclosure about the “limitations” of

                such device and “the difficulties with respect to its use.”

                        4.     Free Services:      If an advertisement contains a statement that

                services or information will be furnished free of charge, it must, in fact, be

                furnished entirely free of charge.     Rule 206(4)-1(a)(4), specifically, prohibits

                advertising “[w]hich contains any statement to the effect that any report, analysis,

                or other service will be furnished free or without charge, unless such report,

         See Franklin Management, Inc., SEC No-Action Letter, 1998 WL 853257 (Dec. 10, 1998).

01-387322.01                                      4
                analysis or other service actually is or will be furnished entirely free and without

                any condition or obligation, directly or indirectly.”

                        5.     The “Catchall” Provision: Finally, Rule 206(4)-1(a)(5) prohibits

                advertising “[w]hich contains any untrue statement of a material fact, or which is

                otherwise false or misleading.” The SEC has sanctioned advisers, under this

                provision, regarding improper performance advertising, discussed further below.

                Neither the Advisers Act nor its rules require that an adviser submit its advertising

         to the SEC for review prior to its circulation or distribution. And, as a matter of public

         policy, the SEC’s Staff will not review specific advertisements for advisers prior to their


         B.     Performance Advertising

                Rule 206(4)-1 does not specifically address performance advertising. Subsection

         (a)(5) of the Rule, however, prohibits advertising that contains any untrue statement of a

         material fact or which is otherwise false or misleading. Performance advertising is

         addressed and considered by the SEC under this subsection.

                        1.     Public Communications of “Model” or “Actual” Performance

                Results: The Staff no longer takes the approach that the use of “model” or

                “actual” results in an advertisement is per se fraudulent. The presentation of these

                types of performance results is now considered on a “facts and circumstances”

                approach. Facts and circumstances taken into consideration, for example, include

                the form as well as the content of the advertisement, the implications or inferences

                arising out of the advertisement in its total context and the sophistication of the

                prospective client.

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                        The SEC presented the Staff’s view on certain reoccurring issues

                regarding the public presentation of model or actual performance results in the

                influential No-Action letter issued to Clover Capital Management, Inc., 1986 WL

                67379 (Oct. 28, 1986). While the core guidelines presented in Clover Capital are

                not intended to present a “safe harbor” that may be relied upon as an exclusive list

                of factors to be considered in determining the level of necessary disclosure, they

                are significant in any consideration of how the presentation of model and actual

                performance results may be made in advertisements. Overall, the aim is to avoid

                unwarranted implications or inferences to be drawn from such presentations.

                        “In an effort to assist advisers who advertise model or actual results,” the

                Staff in Clover Capital set forth the following advertising practices believed to be

                inappropriate under Rule 206(4)-1(a)(5).

                        Applicable to both model and actual results, Rule 206(4)-1(a)(5) prohibits

                an advertisement that:

                                (i)      Fails to disclose the effect of material market or economic

                        conditions on the results portrayed (e.g., an advertisement stating that the

                        accounts of the adviser’s clients appreciated in value 25% without

                        disclosing that the market generally appreciated 40% during the same


                                (ii)     Includes model or actual results that do not reflect the

                        deduction of advisory fees, brokerage or other communications, and any

                        other expenses that a client would have paid or actually paid;3

         Requiring an adviser to present its performance on a “net-of-fee” basis, rather than on a gross
basis, is a notable aspect of the guidelines presented in Clover Capital. While it appears, in some cases,

01-387322.01                                        6
                               (iii)   Fails to disclose whether and to what extent the results

                       portrayed reflect the reinvestment of dividends and other earnings;

                               (iv)    Suggests or makes claims about the potential for profit

                       without also disclosing the possibility of loss;

                               (v)     Compares model or actual results to an index without

                       disclosing all material facts relevant to the comparison (e.g., an

                       advertisement that compares model results to an index without disclosing

                       that the volatility of the index is materially different from that of the

                       model portfolio); and

                               (vi)    Fails to disclose any material conditions, objectives, or

                       investment strategies used to obtain the results portrayed (e.g., the model

                       portfolio contains equity stocks that are managed with a view toward

                       capital appreciation).

                               Applicable specifically to model results, Rule 206(4)-1(a)(5)

                       prohibits an advertisement that:

                               (vii)   Fails to disclose prominently the limitations inherent in

                       model results, particularly the fact that such results do not represent actual

                       trading and that they may not reflect the impact that material economic

that failing to present performance results on a net-of-fee basis may not be the primary violation upon
which the SEC has based its enforcement activity, it is frequently identified as part of an adviser’s
violation of Rule 206(4)-1(a)(5).
         The SEC has since confirmed its position requiring that performance be presented net-of-fees,
except for custodial fees. Investment Company Institute, SEC No-Action Letter, 1987 WL 108068
(Aug. 24, 1987). And in AIMR, SEC No-Action Letter, 1996 WL 729385 (Dec. 18, 1996), the Staff
expanded several exceptions to Clover Capital’s net-of-fees requirement as it relates to composites that
include the performance of mutual funds, composites that include the performance of wrap and non-wrap
fee accounts and composites that include “multi-manager” accounts.

01-387322.01                                       7
                     and market factors might have had on the adviser’s decision-making if the

                     adviser were actually managing clients’ money;

                              (viii)   Fails to disclose, if applicable, that the conditions,

                     objectives, or investment strategies of the model portfolio changed

                     materially during the time period portrayed in the advertisement and, if so,

                     the effect of any such change on the results portrayed;

                              (ix)     Fails to disclose, if applicable, that any of the securities

                     contained in, or the investment strategies followed with respect to, the

                     model portfolio do not relate, or only partially relate, to the type of

                     advisory services currently offered by the adviser (e.g., the model includes

                     some types of securities that the adviser no longer recommends for its

                     clients); and

                              (x)      Fails to disclose, if applicable, that the adviser’s clients had

                     investment results materially different from the results portrayed in the


                              Finally, applicable specifically to actual results, Rule 206(4)-

                     1(a)(5) prohibits an advertisement that:

                              (xi)     Fails to disclose prominently, if applicable, that the results

                     portrayed relate only to a select group of the adviser’s clients, the basis on

                     which the selection was made, and the effect of this practice on the results

                     portrayed, if material.

                     2.       “One-On-One” Exceptions When Presenting Model or Actual

               Performance Results: An adviser may present model and actual performance

01-387322.01                                      8
               results on a gross-of-fees basis in certain types of “one-on-one” presentations to

               wealthy individuals, pension funds, universities and other institutions. The SEC

               Staff’s no-action position on this matter, as presented in Investment Company

               Institute, SEC No-Action Letter, 1998 WL 235022 (Sept. 23, 1988), was subject

               to compliance with the following conditions:

                              (i)     disclosure that the performance figures do not reflect the

                      deduction of investment advisory fees;

                              (ii)    disclosure that the client’s return will be reduced by the

                      advisory fees and any other expenses it may incur in the management of

                      its investment advisory account;

                              (iii)   disclosure that the investment advisory fees are described

                      in Part II of the adviser’s Form ADV; and

                              (iv)    a representative example (e.g., a table, chart, graph or

                      narrative) which shows the effect an investment advisory fee, computed

                      over a period of years, could have on the total value of a client’s portfolio.

                      The SEC Staff also noted in this same no-action letter that they would not

               recommend any enforcement action to the SEC if an adviser provided gross

               performance data to consultants as long as the adviser instructs the consultant to

               give the performance data to prospective clients of the adviser only on a one-on-

               one basis and the consultant provides the disclosure in (i) to (iv) above.

                      3.      “Portability”—Performance of Predecessor or Prior Advisers:

               The performance of an account managed at a predecessor adviser can be used in

01-387322.01                                     9
                advertising to an adviser’s successor clients. This too requires compliance with

                certain conditions:

                               (i)      the person or persons who manage the account at the

                        successor were also those primarily responsible for achieving the prior

                        performance results;

                               (ii)     the accounts managed at the predecessor adviser are so

                        similar to those currently under management that the performance results

                        would be relevant to prospective clients;

                               (iii)    all accounts managed in a substantially similar manner are

                        advertised (unless the exclusion of an account would not result in showing

                        materially higher performance);

                               (iv)     the advertisement is consistent with Staff interpretations

                        with respect to the advertisement of performance results (e.g., Clover

                        Capital); and

                               (v)      the advertisement includes all relevant disclosures,

                        including that the performance results were from accounts managed at

                        another entity.4

                        Performance achieved at prior advisers may also be used when, for

                example, a portfolio manager joins a new investment adviser. In the mutual fund

                context, the prospectus for a mutual fund may include the performance of the fund

                manager while at a prior investment adviser. The presentation of such results may

                be made provided that (i) no other person played a significant part in achieving

         See Horizon Asset Mgmt., SEC No-Action Letter, 1996 WL 554956 (Sept. 13, 1996).

01-387322.01                                     10
                the adviser’s performance and (ii) the performance information is not presented in

                a misleading manner and does not obscure or impede understanding of

                information that is required to be in the prospectus.5

         C.     AIMR Standards and New Guidelines

                The Association of Investment Management and Research (AIMR) has

         formulated AIMR Performance Presentation Standards (AIMR-PPS) to provide the

         investment community with a set of ethical standards for investment firms to follow

         when presenting their performance results to clients. These ethical standards are to be

         used primarily by investment managers in the United States and Canada in order to create

         performance presentations that ensure fair and full disclosure. AIMR reports the AIMR-

         PPS are the leading industry standard in the United States and Canada for the ethical

         presentation of investment performance results.

                The AIMR-PPS had not previously addressed the issue of advertising a firm’s

         compliance with the Standards. AIMR had taken the position that firms could not present

         any information other than the full AIMR-PPS compliant presentation when making the

         claim that a firm is in compliance with the AIMR-PPS. AIMR recently developed the

         AIMR-PPS Advertising Guidelines (included as Appendix C to the Standards) to allow

         firms to advertise that they claim compliance with the Standards without reproducing an

         entire presentation required under AIMR-PPS. A copy of the AIMR-PPS Advertising

         Guidelines, including sample advertisements presented with the Guidelines, is attached to

         this Outline.

         See Bramwell Growth Fund, SEC No-Action Letter, 1996 WL 450346 (Aug. 7, 1996).

01-387322.01                                     11
                Under the Guidelines, firms can claim compliance with the AIMR-PPS and

         present limited or no performance information in an advertisement so long as the firm

         adheres to the Guidelines. Firms that wish to advertise their claim of compliance in an

         advertisement have two options: (1) firms that claim compliance with the AIMR-PPS

         and that choose to advertise their claim in an advertisement that contains performance

         information must present certain information that is a subset of the information required

         by the AIMR-PPS and (2) firms can claim compliance with the AIMR-PPS without

         presenting any performance information.

                The AIMR-PPS were recently revised and adopted on May 20, 2001. The revised

         Standards became effective January 1, 2002. The revised AIMR-PPS and the AIMR-PPS

         Advertising Guidelines, the Adopting Release and a matrix summarizing the changes are

         available at

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