" ,.' . .' ~ ,".'. fll'-"':,r~ ~!§....".~..." ~ ~ . "',; ~.'!i ~ i:' \ \ ~ o. . ., ° l' I', i' t,',. ~ .;,¡" L, a ~ ..,,' b. "i ~\ " ...... t',i ,;,':.:....'! .1,' - . ,'r~ :' r~ ". 0.. , V". ::~ ': '.r~ ..:l t3 ~ ~~ ;'.. t: ~.~I OCT 28 '986 . ( OUr Ref. ll). 86-264-CC Clover capi tal Management, Inc. File ~. 801-27041 RES~SE OF THE OFFICE OF CHIEF CXXJNSEL DIVISION OF INVES'lMENT MANAGEMENT Your letter of June 3, 1986, requests our assurance that lile would not ACOIIIDend any enforcement action to the Cori1nission under Rule 206(4)-1(a)(5) of the Investment Advisers Act of 1940 ("Act") if Clover capital Management, Inc. ("Clover"), a registered investment adviser, uses investment results derived from a "model" portfolio in advertisements (hereinafter "model results"). As described mre fully in your letter, the model portfolio was established by Clover on January 1, 1985, and consists of the same securities that Clover reconmended to clients during that time period. As your letter notes, Clover's investment approach incorporates the philosophy that all of its clients should invest in the same securities, with variances in specific client objectives being addressed via the asset allocation process (Le., the relative lileighting of stocks, bonds, and caf¡h equivalents in each accoünt). 1'hus, while the D:X3el results do not correspond directly to the results achieved by any actual client account, Clover has managed the inc:idel portfolio with the same investment philosophy it uses for client accounts. Because of the significant degree of interest in this issue, and in the related issue of advisers usiD3 actual investment results of client accounts under management in advertisements (hereinafter "actual results"), w wish to take this opportunity to set forth the staff's views on these issues. (i. section 206 of the Act prohibits ,certain transactions by any invesbnent adviser, whether registered or exeinptfrom registration pursuant to section 203(b) of the Act. Under paragraph (4) of section 206, the COIrmission has authority to adopt rules defining acts, practices, and courses of business that are fraudulent, deceptive, or manipulative. Pursuant to this authority, the Commission adopted Rule 206(4)-1, which defines .the use of certain specific types of advertisements 1/ by advisers as fraudulent, deceptive, or manipu￾lative. 2/ Although the-rule does not specifically Prohibit an adviser from using ioodel,. ,or actual results, or. prescribe the manner of advertising these results, paragraph .'(5) of the rule makés it a ,fraudUlent, deceptive, or manipu￾lative act for any:investment adviser to, distribute, . directly or indirectly, any advertisement ~at co.ntains apy untrue statement of a material fact or that 1/ Rule 206(4)-Úb)gen~r~lly de',fines än "adverti~ment" to include any cámiunieation addresaed:to riDre ~than one persan tilat offers any investment adviaory service ~th regard to secur~ties. - " . ' ..; '. ';' , :. - . -" . ~ - ' ' y For
'ee, :Ru1206(4)-l'p~lii#its :'an,adviserfJ;'Qrn using advertisements thatiricludè. teåtilOOníals (paragraph. (an or that ,refer to past specific recoriinendations unless cer~ln informatioñ 'is provided (paragraph (b)). 1tiestaff is currently"xeviewtD;i Rule 206(4)-~ ~ detennine whether it needs to.be revised or updated. See Investment Adviàers Act ReL. ~. 1033 (Auej: 6, ''¡986). -' '., ,.' - )- . , Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for more information:
https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements

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" is otherwise false or misleading. Y Accordingly, the applicable legal standard governing the advertising of model or actual results is that contained in paragraph (5) of the rule, Le., whether the particular advertisement is falae or misleading. 4/ - - The staff no longer takes the position, as it did a number of years ago, that the use of DDdel or actual results in an advertisement is J2!E ~ fraudulent under section 206 ( 4) and the rules thereunder, particularly Rule 206(4)-1(a)(5). 5/ Rather, this determination is one of fact, and we believe the use of model-or actual resul ts in an advertisement would be false or -= misleading under Rule 206(4)-l(a)(5) if it implies, or a reader would infer from it, something about the adviser's competence or about future investment results that would not be true had the advertisement included all material.----- - facts. 6/ Any adviser using such an advertisement must ensure that the 1:'- advertiãement discloses all material facts concerning the m::x3el or actual results so as i:oavoid-these unwarrañte'd'implications or inferences. 7/ Because of the factual nature of the deterriiination, the staff, as a matter of policy, does not review any specific advertisements. 8/ 1'herefore, we express no opinion regarding your proposed advertisements. - , In order to assist advisers who advertise ioodel or actual results, we wish to take this opportunity to set forth certain advertising practices the staff believes are inappropriate under Rule 206(4)-1(a)(5). The list is not ï 'li As a general matter, whether any advertisement is false or misleading will depend on the particular facts and circumstances surrounding its use, including (1) the form as wll as the content of the 'advertisement, (2) the implications or inferences arising 'out of the advertiBment in its total context, and (3) the sophistication of the prospective client. see, !..g,., Covato/Lipsitz, Inc. (pub. avaiL. OCt. 23, 1981)("COvato") ~ Edward F. O'Keefe (pub._~vaii. ,Apr. l3,.. 1978)("O'K~fe"b. Anametrics Investment Management (pub. avail'" May 5, 1977)(.flAnametrics"). 4/ Of course, if an' advertisement containïng iOOdel or...:actual results also includes any of the sPecific advertising practices addressed by paragraphs (a)(1)-(a)(4) of Rule 206(4)-1, the advertisement would have to comply with the ,requirements, of these paragraphs. ~ - ::.. '.. , -:,.:.: -,' .~ ~ '-,...; .. §l ~/ e.2,'" -A.R.- sa.hmeidler & 'CO. '(Í:iub. avail...' .June J, 1976)~, 'SChield Stock .s~rvices" .~c. (~., ,av:aiL Felj. ~6, :,~972). , ' §/ ~,' !.'~:i':, Arlametricí:ï, cOvato, ãtid Ô''Keefe, 'supra riÒt~ ~. 7/ Id. 8/ .§!!, !..g,., Anametrics, supra note 3. \

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, ~ . intended. to address all advertising practices prohibited by Rule 206(4)-l(a) (5) and does not create a -safe harbor" that may be relied upon by an adviser as an exclusive list of the factors that must be considered in determining the type of disclosure necessary when advertisiD3 model or actual results. Items (1)-(6) below apply to both mdel and actual results~ Items (7)-(lO) apply to mdel resul ts ~ and Item (11) applies to actual results. In the staff's view, Rule 206(4)-1(a)(5) prohibits an advertisement that:
Model and Actual Results
(1) Fails to disclose the effect of material market or economic Ai .:,..., ,', ,condit~ons.On ,~' resul~,portra~e3 (!..s.., an adver~ise~nt" stating that the accounts of the adviser's clients appre- ¿ r ciated in value 25% without disclosing that the market generally appreciated ~oi during the same per'iod) ~ 9/ ¡:w'(2) includes model or actual ~sultsthat do not reflect the deduction \ of advisory fees', 'brokerage or other coimiissions, ánd any other ) expenses that a client would have paid or actually paid~
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(3) Fails to disclose whether and to what extent the results portrayed ) reflect thereinvesbnent of dividends ~nd oth.e.r earnings~ r'O .' ,j' ,'; , (4) Suggests or makes claims about the potential for profit without also disclosing the possibili ty of loss ~ lO/ -::.. ,(5) Ckimpares IOOdel or actual resul ts to an .index wi thout disclosing all \ . t ~ .. . material facts relevant to the comparison (!.s.. an advertisement that canpares rodel results to an index without disclosing that the volatility of the index is materially different from that of the model portfolio) ~ 11/:-,' · ' , f ,/ .. ,(6) Fails to disclose any material cond.itions, objectives, or investment strategi~su~ to ob,tain the results portrayed (!..s.., " the model portfolio contains equity stocks that are managed wi th i a view towards capi tal appi::eciation) ~ I '. ~ !. \ !I -Id.., ' . ' ;¡, !!li .§!! F. Eberstadt & Co., Inc. (pUb. avail. July 2, 1978). 11/ see,!.. 9,.' Anametrics, supra note 3~ Multinational Investments, Inc (pub. avail., sept'. 17, 1977)-. ',- .-. ,

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(7) Fails to disclose prominently the limitations inherent in model results, 12/ particularly the fact that such results do not representactual trading and that they may not reflect the impact that material economic and market factors might have had on the adviser's decision-making if the adviser wre actually managing clients' money~ (8) Fails to disclose, if applicable, that the conditions i 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; (9) Fails to disclose, if applicable, that any of the securities contained in, or the investment strategies followed with respect '1:0, the mdel portfolio do not relate, or only partially relate, to the type of advisory services currently offered by the adviser (.!.s.., the model includes some types of securities that the adviser no longer recooinends for its clients) ~ l3/ (10) Fails to disclose, if applicable, that the adviser's clients had investment results materially different from the results portraYed in the model ~ Actual Resul ts (11) 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. 14/ 12/ Wi th respect to, I'IDdel -resul ts, the staff recognizes' tha t advisers may ,wish to advertise model results derived from model portfolios that differ in form and structure from that presented by your letter. we believe that to the extent it is, more difficult"to verify or objectively , , - test the criteria underlying the nodel portfolio in question, the dis￾closure obl-igation of the adviser would correspond~ngly increase. - ' - W .§!!., .!.,9..:' Oovato, supra note 3. !!I ~, !..,9.." O'Keefe, supra note 3. ,

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We wish to emphasize that: (l) it is the responsibility of every adviser using model or actual results to ensure that the advertisement is not false or m1sleading~ (2) the list set forth above of advertising practices the staff believes are prohibited by Rule 206(4)-l(a) (5) is not intended to be all-inclusive or to provide a safe harbor~ and (3) the staff, as a matter of policy, will not review specific advertisements. As we agreed, this response will be made public immediately. ~f~ 'lhomas P. Lemke Chief COunsel

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I, ,"LW".. fi.¡j. '~40 - _...... ....-~..,.. t "; Act...ii".L... .' ...--.... .".. '" ........- -- ' June 3, 1986 . ~::1~n.2-() ¿11J-:'¡C;¿cr 1~ ..J' Dubl1c' j,.,- l'7 / vallob1l1ty / ~/2!..t:'!.f.-..",-,*- .... Mr. Thoiaas P. Leake Chief Counsel Division of Investment Management Securities & Exchange Commission 450 5th Street N.W. Washington, D.C. 20549 Dear Mr. Lemke:
Clover Capital Management, Inc. is an investment counseling firm registered with the S.E.C. under the Investment Advisors Act of 1940. I have enclosed a copy of a letter we recently received from Mr. Frank Morrison of the S.E.C. 's New York City office informing us that our use of a Model Pertfolio for tracking the firm's investment record viòlate~ule 206 (4 )-1(a)(5). In a subsequent telephone conversation with Mr. Dolan, an associate of Mr . Morrison's, we were made aware that yòur office has the authority to rule on such matters on a case-by-case basis and to issue "No Action Letters", where warranted. Please consider our case based on the following information:

1. Clover Capital Manageme'nt, Inc. is an investment
   management firm founded in October, 1984 by Michael E. Jones, CFA and Geoffrey Rosenberger, CFA. We had several very successful years experience as investment analysts and portfolio 'managers at the firm of Manning and Napier' Advisors, Inc.. In starting ~ur new. firm~ we were faced with the dilemma of providing prospective clients with an understanding' otour prior and current investment results and style of management. In dealing with this problem, we aspired ~o maintain the highèst possible ethical standards. Thus, we have not represented our previous firm's record as __ our own or..&8 an indic:.ation.of-Clover Capital Management's ability. We have choosen to forego discussion ~ d of our specific results on clients prior to forming Clover Capital.., '...' - - I ...~:. However, as ,y~u, know, the issue of demonstrating the firm's ~.. . competence' and style of management is important in presenting ='''our service'to prospective clients. Our problem is to find a way to show what we are doing in our research and management effort at Clover Capital Management, Inc., without violating client confidentiality and without misrepresenting our performance to the public. , Clover Capitil1 Management, Inc. . 5 Tobey Village Office Park · Pittsford, New York 14534 · (716) 385-6090

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One approach to this problem involves presenting the performance achieved among our account base. However, the securities markets have been quite volatile in the past 18 months and our client base has grown consistently each month. As a result, a portfolio that started in January, 1985 has different results than one we began in September, 1985. To take an arithmetic average of each client's actual results and present that as the firm's track record would be misleading due to the significant standard deviation from client to client based on date of entry to our firm's management. On the other hand, to jus t pick one or two client portfolios would be equally misleading because of differences in the timing of cash flows, specific client objectives and other considerations which may be unique to a small sample of accounts. We recognized at the outset that this would be the case. We also recognized this presentation of results would not satisfy questions on portfolio construction and investment style with respect to diversification, portfolio beta,' asset allocation and related items. The raw results would also be impossible to verify without violating client confidentiality. The most accurate, verifiable reflection of our true investment product, in light of these circumstances, was to establish a Model Portfolio as of January 1, 1985, 'which we would manage exactly as we would a tax-exempt client portfolio with no restrictions as to income and without any cash flows into or out of the fund.
2. The securities purchased and sold in the Model Portfolio are
also purchased and sold in our client accounts under management at the time of the transaction. It is important to note that our investment approach incorporates the philosophy that all of our clients should own the same stock selections, with variances in specific client objectives being addressed via the asset allocation: process (the relative' weightings of stocks, bonds and cash equivalents in each account). For example, when we make a decision to invest in a common 'stock, we also decide what percentage of' each client's assets we wish to commit to that particular ~quity; Differences ,in client objectives are reflected'ln' the weight1li8s pla'êed for" each' account. 'Most of our accounts are tax exeupt retirement funds with conservative . objeetives, and tbereforereceive similar weightings. However , some clients have differing objectives due to current income _-,' requirementa-,~ .oral-considerations, tax considerations, "equities only" restrictions, and other factors which may alter the weightings in specific investments. The Model Portfolio weightings are determined according to it's stated hypothetical structure as a conservative pension fund. ,

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3. We have taken extensive steps to insure that the reporting
   format is an objective one. The independent accounting firm of Davie. Kaplan & Braverman was hired to audit our efforts in this effort. To place a purchase or sale transaction. we call Davie. Kaplan & Braverman prior to the 9:30 a.m. market opening. All transactions are assumed to occur at the prior day's closing price as listed in the Wall Street Journal. which Davie Kaplan & Braverman can easily verify. Commissions are charged against each transaction based on a 35% discount from the Cowen & Co. commission schedule. which is roughly the same commission expense level we incur in our client accounts. Investment management fees are also charged against the portfolio in line with our standard client fee schedule.
4. In addition to monitoring the purchase and sale transactions
   in the Model Portfolio. Davie. Kaplan & Braverman also accounts for the dividend and interest income. commission charges and investment management fee reimbursement in the portfolio. The quarterly investment performance reports are also compiled and issued by Davie Kaplan & Braverman. not by Clover Capital Management. Inc. There is a measure of independence and objectivity to our Model Portfolio Report and its calculations which may be lacking in the investment performance figures reported by other investment management firms.
5. We feel it is important that prospective clients see how the
   investment returns being presented to them were achieved. Use of the Model Portfolio allows people to see what stocks we hold and what the recent transaction activity in the account has been. They can develop a feel for our investment style that would otherwise be difficult to achieve prior to entering into a relationship with our firm.
6. The only reference the report makes to investment results is
   on an absolute return basis. The report only records a percentage increase in asset value. It makes ~ comparisons to any stock or bond market indexes. We believe that. for the above reasons. our Model Portfolio report provides an excellent proxy for our investment approach and track record. However. we also understand the Commission's concern about the potential for misunderstanding of the Kodel' s purpose on the part of the public. Therefore. we are willing to incorporate the following statement (or a similar version which you may prefer) into our report:
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"The Clover Capital Management, Inc. Model Portfolio represents a fictional account which Clover Capital Management. Inc. ("CCM") attempts to manage in a manner similar to that of a tax-exempt client fund with no need for special portfolio considerations. The investment objective for this portfolio over a four year time period is to exceed, by at least 3%. the compound annual rate of return available on a Treasury Note with a four year maturity and at the same time to limit volatility in such a way as to avoid the incurrance of a negative return during any calendar year. It is CCM's intention to own the same securities in each client portfolio with similar objectives. Securities transactions will not be undertaken in the Model Portfolio until at least half the eXisting accounts under management have completed the contemplated transaction. However, circumstances such as market fluctuations may exist which may prevent an individual CCM client from owning one or more of the specific securities held in the Model Portfolio. Since the account is fictional, there can be no assurance that a CCM client would have achieved similar rates of return over the same time frame. In addition, since the time period in question is a historical one, there can be no assurance that future results achieved by the firm's clients will in any way resemble those represented by the Model Portfolio." We believe that use of the Model Portfolio is the most valid approximation we can provide a prospective client as to what our investment activity has been since January 1, 1985. While no form of investment performance measutement 1s entirely without fault, of all those available to us this approach is the one which provides the least amount of bias. We therefore respectfully request that you confirm that _you will not recommend enforcement action if we continue to use the Model Portfolio in the manner stated in this letter and with the explanatory and disclaimer language found in -the enelosed Model Portfolio copy. Your assistance'in this matter is most appreciated. If you have any questions. :-please, eall either 1Ie',or Kichael E. 'Jones, at 716-385-6090. ~ - :. 3Z7~ . /2t-~l~~y~ Clover caPit~M4nagement, Inc. by Geoffrey Rosenberger, President, ~ , .., .:.::-.. - - \ ;- ~. '; -