SEC Division of Investment Management staff letter: J.P. Morgan Investment Management, Inc.

MAY - 7 199

Our Ref. No. 95-667-CC

J. P. Morgan Investment
RESPONSE OF THE OFFICE OF CHIEF COUNSEL Management, Inc. DIVISION OF INVESTMNT MAAGEMENT File No. 801-21011 Your letter of February 1, 1996 requests our assurance that we would not recommend enforcement action to the Commission under
Section 206 (4) of the Investment Advisers Act of 1940 (the
"Advisers Act") or Rule 206(4)-1 thereunder if J.P. Morgan

Investment Management, Inc. ("JPMIM"), a registered investment

adviser, advertises the performance of a particular investment

strategy by calculating the performance of accounts for which

JPMIM employs that strategy and deducting from that performance

the highest advisory fee charged to any account employing that

strategy during the performance period.

You state that JPMIM provides investment advisory services,

typically to institutional investors, with respect to a wide

range of asset classes and sectors. Al though JPMIM has fee

schedules for its various investment strategies, you state that

some clients may negotiate and pay fees lower than those

specified in the schedules. Because of these fee variations,

JPMIM proposes to present the composite performance of accounts

for which it employs a particular investment strategy by

deducting the highest fee charged to any account employing that

strategy during the performance period. You represent that any

quotation of this performance data will be accompanied by

disclosure that the performance reflects the deduction of the

highest fee charged.

Section 206 (4) of the Advisers Act prohibits an investment

adviser from engaging in 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 took the position that Rule 206 (4) 1 (a) (5) requires that advertised performance reflect the deduction of advisory fees that a client would have paid or

actually paid. In Securities Industry Association (pub. avail.

Nov. 27, 1989) ("SIA"), the staff was asked to modify the position taken in Clover Capital so that an adviser could

advertise performance information that reflected a "model fee,"

which in one instance was described as the highest fee charged to

an account included in a composite. The staff granted relief

only with respect to performance that occurred prior to May 27,

1990, stating that performance occurring after that date must

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

reflect the deduction of the fees actually charged to the

adviser's clients. i/

You maintain that, notwithstanding the staff's position in SIA, advertising performance that reflects a model fee in the manner that you propose would not be fraudulent , deceptive, or misleading and therefore would not violate Section 206 (4) or Rule 206 (4) -1 (a) (5). We agree. In order to obtain the ease of calculation that derives from using a model fee, JPMIM is willing

to advertise lower performance numers than it could have in

reliance on Clover Capital. When an adviser advertises

performance that is no higher than that which reflects the

deduction of actual fees, there appears to be little chance that

an investor would be misled. ~/ In our view, therefore,

assuming appropriate accompanying disclosure, Rule 206 (4) -1 (a) (5) does not prohibit an adviser from advertising performance that

reflects the deduction of a model fee when doing so would result

in performance figures that are no higher than those that would

have resulted if actual fees had been deducted. ~/

Accordingly, we would not recommend enforcement action to

the Commission if JPMIM advertises the composite performance of

accounts for which it employs a particular investment strategy by

deducting a model fee equal to the highest fee charged to any

account employing that strategy during the performance period.

Because this response is based on the facts and representations

in your letter, you should note that any different facts or

representations might require a different conclusion. j/~/~~ Veena K. Jain

At torney i/ The staff provided limited relief in recognition of the fact

that many advisers did not, at the time of SIA's request,

have records enabling them to calculate performance net of actual fees. ~/ Documentation reflecting the manner .in which the model fee

is calculated should be maintained by the adviser under

Advisers Act Rule 204-2 (a) (16) as part of the calculation of

performance data used in advertisements.

~/ You should note that this position does not depend on the

client's level of sophistication.

• 2

~Gp~Gp~ c9~~~

~?/od ~?/od IOOt#-,MfK

Advisers Act

Rule 206(4)-1(a) (5)
212 806 54 Direct Dial:
Fax: 21280660
Telex: 17693 STROOCK NY
212-806-6049
February 1, 1996 wr :r A
SEON ~O(P ( Ll ) - l ( Q 'i 5 ') ~ Office of the Chief Counsel Division of Investment Management Rtr.ù Securi ties and Exchange Commission pUloJ 5 J 7 / q Cø 450 Fifth Street, N. W. AVAILABILIT Washington, D. C. 20549

Ladies and Gentlemen:

We are writing on behalf of J. P. Morgan Investment Management

Inc. (" JPMIM") to request your advice that the Staff will not

recommend enforcement action if JPMIM advertises(ñistorical

performance of certain of its different investment strategie~ by

deducting the highest fee charged to a customer employing each

such strategy during the relevant period.

I . FACTS

JPMIM is an investment adviser registered under the Investment

Advisers Act of 19401 as amended (the "Advisers Act"), with

assets under management exceeding $150 billion for approximately

1,000 clients. The average account size is $100 million and,

with limited exceptioni account size ranges from $20 million to

$1.5 billion.

JPMIMi s clients typically are institutional investors such as:

pension and other employee benefit plans of corporations i state

and local governments i and labor unions; other tax-exempt

organizations 1 such as chari table foundations i educational

insti tutions 1 endowments and foreign governments; and insurance companies, investment companies, and other corporations and off￾shore entities.

JPMIM offers advisory services across a wide range of asset

classes and sectors. Annual fees for the most often used types

of services typically range from .30 of 1% for the first $75

million in fixed income accounts to .60 of 1% for the first $25

40785355
Washington, D.C. 20036-462 Los Angeles, CA 90067-3086 Miami, FL 33131-2385 H-l088 Budapest, Hungar 1150 Seventeenth Street N.W. 2029 Century Park East 200 South Biscayne Boulevard Rákóczi ut 1-3 202 452 9250 310 556 5800 305 358 9900 361 26 95iD

~Gp9~Gp~

February l, 1996

Page.2
million in equity and balanced accounts; however, some clients

may negotiate lower fees.

JPMIM desires to disseminate to existing and potential clients

brochures describing its various investment strategies and their performance. It believes that clients would find the inclusion of performance information in the brochures useful in their

decision-making process.
JPMIM believes that providing a strategy's performance based on

actual fees would not be practicable because of the fee

variations. To ensure that a recipient of a brochure does not

receive Lnformation that overstates performance, JPMIM is

preparedLto present performance for a particular investment

strategy after deducting the highest fee it charges to a

customer employing that strategy during the period for which

performance is reported;: To make certain that readers would be

aware of this practice, it proposes to add the following legend

to the performance information:

Performance figures are net of fees charged to customers.

For each strategy shown, the performance has been reduced

by the amount of the highest fee charged to any JPMIM

customer employing that particular strategy during the

period under consideration. Actual fees may vary depending

on, among other things, the applicable fee schedule and

portfolio size. JPMIM's fees are available upon request

and also may be found in Part II of its Form ADV. Past

performance does not guarantee future results.

For the reasons set forth below, we are of the opinion that the

use of the proposed fee calculation in advertisements would not

violate the Advisers Act~

II. DISCUSSION

No statute or rule of the Commission specifically prohibits the

use of so-called "model" fees in the manner JPMIM proposes. In

a no-action letter, Securities Industrv Assoc. (1989 SEC No-Act.

LEXIS 1177 (November 27, 1989)), the Staff expressed its view

that, after a grace period following the publication of the

letter, any advertisement that includes performance data must

reflect deduction of an adviser's actual fees. The Staff's

position was based on its interpretation of the Rules under

40785355

~QP9~Gp~

February l, 1996

Section 206 of the Advisers Act and, in particular, Rule 206 ( 4 )
l(a) (5).

As the Staff wrote in a later letter on a related issue:

Rule 206 (4) -l. .. defines the use of certain specific

types of advertisements by advisers as fraudulent, deceptive, or manipulative. Paragraph (a) ( 5) of rule 206 (4) -l makes it 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.
Clover Capital Manaqement, Inc., 1991 SEC No-Act. LEXIS 978, *3

(July 19, 1991).

The Staff's response continues:

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 well as the content of the advertisement, (2) the

implications or inferences arising out of the advertisement

in its total context, and (3) the sophistication of the prospective client. Id. (Citation omitted)

We. believe JPMIM' s proposal to advertize performance in the

manner described to highly sophisticated investors who are

informed by an appropriate legend of the basis on wb~ch

historical performance is calculated would not be fraudulentr deceptive or misleading. Accordingly, we are of the opinion that JPMIM's proposed actions would not violate the Advisers Act

and, in particular, Section 206 and the relevant Rules

thereunder.
40785355

~QP~QP~

February l, 1996

We are hopeful of receiving your favorable response. If the

Staff is unable to grant the requested relief, we would

appreciate the opportunity to discuss your conclusions before

you formally reply to our request. .

Very truly yours,
STROOCK & STROOCK & LAVAN

Stuart H. Coleman

40785355