SEC Division of Investment Management staff letter: Linsco/Private Ledger Corp.

i NOV 1~~4

p Our Ref. No. 94-333-CC

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Linsco/Private Ledger Corp.

DIVISION OF INVESTMNT MAAGEMENT File No. 801-10970

Your letter of June 6, 1994 requests our assurance that we would not recommend enforcement action to the Commission under
Section 22 (d) of the Investment Company Act of 1940 (" 1940 Act")
if Linsco/Private Ledger Corp. ("LPL") charges its customers a

support services fee for transactions in investment company

securities while also receiving Rule 12b-1 fees from those

investment companies.

LPL is registered as a broker-dealer under the Securities

Exchange Act of 1934 and as an investment adviser under the

Investment Advisers Act of 1940. Through its Strategic Asset

Management ("SAM") accounts, LPL, acting as agent, makes

available to customers over 800 no-load and load-waived

investment companies, i/ as well as other securities. LPL

provides SAM account customers with investment advisory,

educational, in-house trade processing, and administrative

services. Customers receive periodic account statements that

reflect account activity and positions, and quarterly performnce reports consolidating income, gain, and performnce informtion. LPL uses a third party, Pershing, ~/ to prepare these reports for

SAM account customers, as well as to provide clearing, custodial,

and customer- level accounting services.

Currently, customers pay LPL an asset -based management fee

of up to 2.2 percent, depending on the size of the account, and

pay no commissions for the purchase or sale of securities in

their SAM accounts. LPL also charges customers a transaction fee

for in-house trade processing services. ~/ LPL pays a portion of

this fee to Pershing. SAM account customers pay no other fees to

LPL. i/ Load-waived investment companies are open-end funds that

waive their regular sales loads for SAM account customers.

Telephone conversation with Alice Pellegrino on

September 12, 1994.

~/ Pershing is a division of Donaldson, Lufkin & Jenrette

Corporation which is not affiliated with LPL. Telephone

conversation with Alice Pellegrino on September 12, 1994.

~/ The fee is $20 for each purchase or redemption of no-load or

load-waived investment company shares, or for each

redemption of load investment company.shares that have been

transferred by customers from other LPL brokerage accounts

into their SAM accounts.

.:¡
-.. - -:2 '
LPL proposes to eliminate the transaction fee for investment

company share purchases and redemptions and to enter into Rule

12b-1 agreements with certain investment companies that are

available through the SAM accounts. 4/ The Rule 12b-1 fee will

compensate LPL for the administrative, in-house trade processing,

and educational services provided to its customers. LPL also

proposes to charge customers a support services fee with each

purchase or redemption of no-load or load-waived investment

company shares, and with each redemption of load investment

company shares. Pershing will receive this support services fee

as compensation for providing clearing, custodial, 'and customer-

level accounting services.

Section 22 (d) of the 1940 Act prohibits an investment

company from selling its redeemable securities except at "a

current public offering price described in the prospectus" to any

person other than to or through a principal underwriter for

distribution. It further states that "if such class of security

is being currently offered to the public by or through an

underwriter, no principal underwriter of such security and no

dealer shall sell any such security to any person except a

dealer, a principal underwriter, or the issuer, except at a

current public offering price described in the prospectus."
Section 22 (d) , s restrictions do not apply to a broker, as that
term is defined in the 1940 Act. á/ Because LPL purchases and

redeems investment company shares as agent for its customers,

Section 22 (d) does not apply to LPL's involvement in these

transactions and, therefore, does not prohibit the support

services fee. ~/ This response is based on the representations

made to the Division. Any different facts or circumstances might

require a different conclusion.

DCtOv~ o.-
Barbara Chretien-Dar
Senior Counsel

~/ The Rule 12b-1 fees will be calculated as àpercentage of

assets held by SAM account customers in each investment

company.
á/ United States v. National Ass'n of Sec. Dealers, 422 U.S.

694 (1975). See also Charles Schwab & Co. (pub. avail.

Aug. 6, 1992); A. WaYne Harrison (pub. avail. Sept. 20,

1977) .
~/ Although LPL may have selling dealer agreements with funds that are available to both its SAM aceount customers and to " its other brokerage customers, you state that LPL acts solely in an agency capacity when it sells these funds to SAM account customers. Telephone conversation with Robert
C. Hacker on October 4, 1994.

,-. --r__-.

KIRKPATRICK & LOCKHART
SOUT LOBBY - 9TH FLOOR
1800 M STET N~. BOSTON, MA
WASHINGIN, D.c. 20036-5891 HARISBURG, PA MIAMI, FL TELEPHONE (202) 778-90 NEW YORK, NY TELEX 440209 KL DC UI PITfBURGH, PA FACSIMILE (202) 778-9100 ROBERT C. HACKER (202) 778-9016 1940 Act/22 (d)

ACT rl Ai - 4-0
SECTION ~a Cd')
RULE Assistant Chief Counsel
Division of Investment Management PUBLIC Securities and Exchange Commission AVAILABILIT l (- I ~ q4 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Linsco/Private Ledger Corp.

Dear Ms. Donohue:

We are writing to you on behalf of our client, Linsco/

Private Ledger Corp. ("LPL"), to request that the staff of the

Division of Investment Management of the Securities and Exchange

Commission ("Commission") advise LPL that it would not recommend

any enforcement action based on Section 22 (d) of the Investment

Company Act of 1940 ("1940 Act") if LPL charges its customers a

per transaction charge to cover clearing, custodial, and

customer- level accounting services provided by Pershing, a

division of Donaldson, Lufkin & Jenrette Securities Corporation

("Pershing"), in connection with investments in certain mutual

funds and receives Rule 12b-1 fees from those mutual funds" all

as described below.

STATEMENT OF FACTS

LPL is a broker-dealer registered under the Securities

Exchange Act of 1934 and is a member of the National Association

of Securities Dealers, Inc. and the Boston Stock Exchange. LPL

is also an investment adviser registered under the Investment Advisers Act of 1940. Pershing provides execution, clearance, and back office services for LPL, including services in

connection with the purchase and sale of mutual fund shares.

DC-145091.1

KIRKATRICK & LOCKHRT
SOUT LOBBY. 9TH FLOOR
180 M ST N~. BOON, MA
WASHINGIN, D.C. 20036-5891 HASBURG, PA TEHONE (202) 778-90 MII, FL NE YORK, NY 1E +4209 K1 DC UI ROBERT C. HACK EAIMIL (202) 778-9100 PITBURGH, PA (202) 778-9016 1940 Act/22 (d)

Assistant Chief Counsel

Division of Investment Management

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D. C. 20549

Re: Linsco/private Ledger Corp.

Dear Ms. Donohue:

We are writing to you on behalf of our client, Linsco/ Private Ledger Corp. ("LPL"), to request that the staff of the Division of Investment Management of the Securities and Exchange Commission ("commission") advise LPL that it would not recommend any enforcement action based on section 22 (d) of the Investment Company Act of 1940 ("1940 Act") if LPL charges its customers a per transaction charge to cover clearing, custodial, and customer-level accounting services provided by Pershing, a division of Donaldson, Lufkin & Jenrette Securities corporation ("Pershing"), in connection with investments in certain mutual

funds and receives Rule 12b-1 fees from those mutual funds, all

as described below.

STATEMENT OF FACTS

LPL is a broker-dealer registered under the Securities

Exchange Act of 1934 and is a member of the National Association

of Securities Dealers, Inc. and the Boston Stock Exchange. LPL

is also an investment adviser registered under the Investment Advisers Act of 1940. Pershing provides execution, clearance, and back office services for LPL, inCluding services in

connection with the purchase and sale of mutual fund shares.

DC-145091.1

KIRKATRCK & LOKHT

The LPL strategic Asset Management Program

LPL's strategic Asset Management ("SAM") account is a

flexible fee-based asset management account available to

investors with a minimum investment of $25,000. Through the SAM

account, investors may invest in no-load and load waived mutual

funds, individual stocks and bonds, and options (buying puts and writing covered calls only). Subject to certain restrictions, investors may bring existing mutual fund and individual security

holdings into the SAM account to be consolidated with new

purchases. In the case of individual security holdings and

mutual funds purchased wi thin the previous two years in an LPL

brokerage account that are transferred to the SAM account, the

customer may be entitled to a credit for a portion of the SAM

Account Fee if an LPL investment representative earned

commissions on the securities or if the securities might

otherwise be liquidated prematurely.

Under the SAM program, LPL acts for its customers as an

agent through which they may purchase or sell shares of over

eight hundred no-load and load waived mutual funds. LPL provides

its customers with investment advisory services, periodic account

statements, quarterly performance reports consolidating their

income, gain and performance information, recordkeeping, and

other services. It also provides in-house trade processing

through a trade desk and a centralized computer linkage to its

network of investment representatives, who are primarily

responsible for accepting and placing their customers' orders.

No commissions are paid for the purchase and sale of securities

in the SAM accounts. currently , LPL receives no 12b-1 fees in connection with mutual fund shares purchased in the SAM accounts.

LPL clears SAM account transactions through pershing.

Pershing provides LPL's customers with clearing, custodial, and

customer- level accounting services in connection with

transactions in their SAM accounts. In addition, during any month that there is acti vi ty wi thin their account, investors will recei ve from pershing a monthly account statement showing account acti vi ty as well as positions held in the account at the month end, and any required conf irmations of transactions that occur within the account. Investors with inactive accounts will recei ve quarterly account statements. In order to cover the costs of the clearing, custodial, and

customer-level accounting services provided by Pershing in connection with investments by SAM account customers, including

purchases and sales of mutual fund shares, LPL pays Pershing a

KIRKATRICK & LOCKHT

service fee on each transaction executed on behalf of SAM account

investors. current fee arrangement

LPL currently charges SAM account customers a standard

asset-based management fee in return for advisory, research and

related analytical services provided to SAM account customers.

The amount of this fee varies, up to a maximum of 2.2 %, depending

on the dollar value of assets under management in each account in

accordance with a fee schedule set forth in LPL's Form ADV. LPL

pays a substantial portion of this fee to its investment

representatives that are responsible for managing the customer

accounts affected. LPL also imposes a charge for processing

transactions in the SAM accounts. In the case of mutual fund

transactions, the charge is $20 for each purchase or redemption

of no-load and load-waived fund shares, and for each redemption

of load fund shares transferred by customers into their SAM

accounts. LPL pays a portion of this charge to Pershing for each

purchase or redemption of no-load and load-waived fund shares,

and for each redemption of load fund shares to compensate

Pershing for its clearing, custodial, and customer- level

accounting services to the SAM accounts. LPL retains the balance

of the fee to compensate it for reporting, recordkeeping, and in￾house trade processing services in connection with SAM account

transactions and its development of promotional and educational

materials for use by its investment representatives in connection

wi th the servicing of their customer accounts.

proposed fee arrangement

LPL proposes to continue its asset-based management fee for

the SAM accounts at its current level, but to eliminate the

transaction charge for mutual fund transactions. To compensate

LPL for its various administrative, in-house trade processing,

and promotional and educational services, which previously were

covered by a portion of the transaction charge, LPL proposes to

enter into agreements with certain mutual funds, shares of which

are available through LPL's SAM accounts, pursuant to which LPL

will provide such services in return for fees paid by those funds

under Rule 12b-1 plans ("12b-1 Fees"). The 12b-1 Fee as to each

fund would be calculated as a percentage of assets held by SAM

account customers in the fund, and it would be up to the funds to

determine whether payments would be made by the fund, its

manager, or its distributor.

To compensate Pershing for its clearing, custodial, and

customer- level accounting services in connection with the SAM

accounts, LPL. proposes to charge SAM account customers a per

transaction services charge ("Support Services Fee") for each

purchase or redemption of no-load and load-waived fund shares,

and each redemption of load fund shares. LPL intends to

negotiate a Support Services Fee with Pershing that will be

comparable to rates charged by other providers of similar

services. LPL will not receive any portion of the support

Services Fee. The proposed support Services Fee will be fully

disclosed to SAM account customers.

DISCUSSION
LPL believes that its proposal to collect 12b-1 Fees and

charge a Support Services Fee on the purchase and redemption of

mutual fund shares in the SAM accounts would comply with the

terms of section 22 (d) of the Act. LPL also believes that the

proposed fee arrangement with respect to the SAM accounts is in

accord with the prior no-action letters issued by the Commission

staff granting favorable relief to brokers that charge

transaction fees in connection with the purchase and sale of no-

load and low load mutual fund shares.

Background

section 22 (d) of the 1940 Act generally prohibits mutual

funds, underwriters, and dealers from selling fund shares to the

public "except at a current public offering price described in

the prospectus." For many years, the Commission viewed the

imposition of any charge for transactions in shares of no-load

funds as a violation of section 22 (d) because of prospectus

representations concerning no-load status. In 1974, however, the

Commission authorized the Division of Investment Management staff to view favorably interpretative requests with respect to proposals that brokers that act independently of funds and their

underwriters be permitted, under certain circumstances, to charge

reasonable fees for sales-related services rendered in connection

with transactions in shares of no-load funds. The Commission

stated that permitting such charges would provide brokers with an

incenti ve to recommend no- load fund shares somewhat comparable to

that existing with other securities, and would compensate brokers

for services rendered in connection with no-load purchases.Y

Because the broker would be compensated for the purchase or sale

of shares by their customers, not by the fund or its distributor,

Y See SEC Announces Mutual Fund Distribution Proqram, Investment Company Act Release No. 8570 (November 4, 1974).

the Commission concluded that they would be acting as brokers, not as dealers in violation of section 22 (d) . Thereafter, the Commission staff advised various brokers

that it would not recommend enforcement action if the brokers

charged transaction fees for services in connection with the

purchase and redemption of no-load fund shares.Y In at least

one letter, the staff has taken the position that it would not

recommend enforcement action if a broker charged a transaction

fee for sales-related services in connection with the purchase

and redemption of low-load fund shares where no load reallowance

was paid to the broker. See Charles Schwab & Co. (pub. avail.

Feb. 2, 1987). Recently, the staff also took the position that it

would not recommend enforcement action if a broker-dealer charged

certain active traders in investment company shares transaction

fees for effecting purchases and redemptions of the shares while

also receiving fees pursuant to Rule 12b-1 plans from those

investment companies designed to compensate the broker-dealer for

non-sales-related services, such as shareholder recordkeeping and

transfer agent services. Charles Schwab & Co. (pub. avail. Aug.

6, 1992) ("schwab IV").

Selling dealers~and others in a mutual fund's distribution

network would be prohibited under section 22 (d) from charging a sales-related fee that was not disclosed in the fund's

prospectus. Thus, in each of these no-action letters, the staff

has emphasized that the broker must be independent of the fund's

regular distribution network in order to ensure that the sales-

related transaction fee imposed by the broker would not be viewed

as being related to the distribution of the fund shares. See,

~, Kidder, Peabody & Co. (pub. avail. Mar. 30, 1987). The

staff has also emphasized that an investor should not be charged

twice for the same services (i. e., "double dipping"), which could

occur if the investor both paid for distribution costs through a

sales load or distribution-related 12b-1 fees and paid an

additional sales-related transaction fee that covered the same

distribution costs. See,~, Olde & Co., Inc. (pub. avail.

Aug. 31, 1984).

Under LPL's proposal, LPL would enter into agreements with

the funds in accordance with Rule 12b-1, pursuant to which LPL

would provide in-house trade processing, account recordkeeping,

Y See,~, Charles Schwab & Co. (pub. avail. Feb 8, 1982); Fahnstock & Co. (pub. avaiL. Dec. 22, 1974)'; Rose & Company

Investment Brokers, Inc. (pub. avail. June 23, 1986); First

American Investment, Inc. (pub. avail. Dec. 18, 1985).

and administrative services, and promotional and educational

information to its investment representatives and their

customers. LPL also may have selling dealer agreements with a number of the funds available for purchase through SAM accounts

that provide sales load waivers for SAM account purchases, as

well as with load funds whose shares have been transferred into

SAM accounts by customers. Thus, LPL might be considered a part

of the distribution network for at least some of the mutual funds

offered through the SAM accounts. LPL's proposal, however, will

be consistent with section 22 (d) and the above-mentioned no-

action letters because LPL will not charge any additional sales-

related transaction fee on purchases and sales of fund shares in

the SAM accounts and will not engage in double dipping.

The support Services Fee charged by LPL will be paid

entirely to Pershing for its clearing, custodial, and customer-

level accounting services. The amount of the Support Services

Fee would remain fixed at the same per transaction rate for all

SAM account customers regardless of the size or frequency of a

customer's transactions. It is calculated on a per transaction

basis because the clearing, custodial, and customer-level

accounting services provided by Pershing are generally triggered

by activity within an account. Thus, a customer is charged for

Pershing's services only to the extent that the customer, through

purchase or redemption acti vi ty wi thin its account, requires the

clearing, custodial, and customer-level accounting services that

Pershing provides.
The support Services Fee in no way resembles a commission or

sales charge paid to a broker for sales-related services, since

no portion of the fee will cover sales-related activities.

Although, in performing its clearing services for the SAM

accounts, PerShing receives from LPL's central in-house trade

processing facility customer buy and sell orders, transmits them

to the funds, and undertakes to ensure that deli very and payment

are properly carried out, Pershing does not sell or redeem fund

shares on behalf of SAM customers. LPL performs the fundamental

sales- and redemption-related services for the SAM accounts. For

example, LPL, through its various investment representatives,

markets the mutual funds available through the SAM accounts,

gathers investment information from the customers, recommends and

implements the appropriate mutual fund investments for the

customers, takes customer buy and sell orders, and processes all

orders through its trade desk and execution system for ultimate

clearance through Pershing. LPL will not charge its customers

any sales-related transaction fee for these' services or retain any portion of the support Services Fee paid to Pershing.

Furthermore, under the proposal, LPL would not receive

compensation that would constitute double payment for the same

services. The 12b-1 Fees received by LPL would compensate LPL

for performance reporting, in-house trade processing,

recordkeeping, and the promotional and educational materials

provided to its investment representatives and their customers.

The support Services Fee charged to SAM account investors would

be paid entirely to pershing to cover its clearing, custodial,

and customer-level accounting services. Although the support

Services Fee would be calculated on a per transaction basis, it

does not cover any services already paid for as part of a fund's

sales load or 12b-1 fees. See Schwab iv. Thus, LPL's proposal

to charge a Support Services Fee and accept 12b-1 Fees would not

result in LPL being compensated twice for the same sales-related services. In granting no-action relief in Schwab iV, the staff allowed

Schwab to charge transaction fees for effecting purchases and

redemption of mutual fund transactions on behalf of certain

customers, while receiving 12b-1 fees from those funds. The

staff did not "view the shareholder subaccounting, and transfer

agency services (provided by Schwab in return for 12b-1 fees) as

being incompatible with Schwab acting solely as broker." Thus,

the staff did not consider such services to be equivalent to the

sales-related services offered by dealers. LPL believes that the

same analysis permits LPL to both accept 12b-1 Fees to cover its

recordkeeping, in-house trade processing, and sales-related

promotional and educational services and to charge its customers

a per transaction support Services Fee to cover the non-sales￾related clearing, custodial, and customer-level accounting

services provided by Pershing.

CONCLUSION
LPL's SAM account program provides LPL's customers with a

much more efficient means of buying and selling mutual fund

shares than can be obtained by dealing directly with the funds

themselves. In addition, it offers investors special services

that more easily allow development of personal financial

portfolios directed toward fulfilling customers' particular

investment needs. The acceptance of 12b-1 Fees from the funds

will result in lower transaction costs for the SAM accounts;

therefore, under the proposed fee arrangement, LPL will be able

to provide SAM account customers, at lower cost, with services

equivalent to those they currently enjoy. Ìf LPL is denied

reasonable compensation for managing the program and ensuring

that investors receive efficient and effective clearing,

custodial, and customer-level accounting services with respect to

mutual fund share transactions, it may be compelled to limit the

full range of services it provides to SAM account customers.

Such a result would in no way further the cause of investor

protection that the 1940 Act, including section 22 (d) thereunder,

was designed to promote.

LPL hereby respectfully requests that the staff advise that

it would not recommend to the commission that any action be taken

if LPL institutes the fee arrangement described above. If you

have any questions, require further clarification, or are

disinclined to issue the requested no-action letter, please call

the undersigned at (202) 778-9016. Thank you for your attention

to this matter.

Sincerely,
~~
Robert c. Hacker