SEC Division of Investment Management staff letter: MLC Limited

If t Ii tT

UNITED STATES wd
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SECURITIES AND EXCHANGE COMMISSIcl :204- 2 WASHINGTON. D.C. 20549 PUO DIVISION OF AV,lAltL l/ZI/9l INVESTMENT MANAGEMENT July 21, 1997

Via Facsimile and Air Mail

Mr. John Fox

General Counsel

MLC Limi ted

105 - 153 Miller Street

North Sydney NSW 2060

Aus tral ia

Dear Mr. Fox:

In your l,etter dated June 18, 1997, you request informtion regarding (i) the requirements in our jurisdiction for keeping

records of advice provided by an investment adviser to its

clients and (ii) the incentives or deterrents that app¡y ~n

relation' to compliance with those requirements. As you know, the

Division of Investment Management of the Securities and Exchange Commission regulates the activities of federally registered

. ." investment advisers pursuant to the Investment Advisers Act of \ 194.0 (the "Advisers Actli).l ;' Under the Advisers Act, an investment adviser has a

fiduciary duty to its clients and, as a fiduciary, must make

suitable recomm~ndations to its cltents in light of their needs , financial circumstances and investment objectives.2 Rule 204-2

~ ~ lPursuant to the National Securities Markets Improvement Act

of 1996 ("NSMIA"), an investment adviser that (i) manages, in the

aggregate, accounts with less than $25 million in assets and (ii) does 'not manage a registered investment company, is subj ect, to state rather than federal regulation. Recordkeeping requirements

vary from state to state and t~y differ from the federal requirements outlined below. Thet fiduciary duty of advisers to their clients applies, in general, to both state~ and federally-

registered investment advisers.

, 2In SEC v. Capital Gains Research Bureau. Inc., 375 U.S.' 1aO

(1963), the U.S. Supreme Court held that Section 206 of the

Advisers Act, the general anti-fraud provision of that Act, imposes

,a fiduciary duty on investment advisers. In 1994, the Commission

proposed a rule under the Advisers Act to codify its long-standing

interpretation that investment advisers have a duty to their

clients to provide only suitable investment 'advice. Investment

Advisers Act Release No. 14.06 (March 16, 1994). Althoughthe

proposed rule has, not been adopted (or withdrawn), the _duty to provide suitable investment advice is enforceable by the Commission under the anti - fraud provisions of the Advisers Act.

Mr. John Fox

July 21, 1997

under the Advisers Act prescribes the specific requirements for

maintaining records of investment advice.

Paragraph (a) (7) (A) of that rule requires an adviser to

maintain originals of any and all written communications of

recommendations and advice made or given (or proposed to be made

or given), but does not require an adviser to put its

recommendations or advice into writing. Paragraph (a) (11)

requires an adviser to maintain a copy of communications

circulated by the adviser to ten or more persons and, if the

communication recommends the purchase or sale of a specific

security and does not state the reasons for such recommendation,

the adviser must maintain a memorandum indicating the reàsons for the recommendation. Pursuant to paragraph (a) (3), an adviser must maintain a memorandum of each order given by the adviser for

the purchase or sale of any security; the memorandum must show,

among other things, the identity of the person who recommended

the particular transaction effected by the adviser for the

client. For your reference, a copy of the rule is enclosed with

the air mail copy of this letter.

An adviser has varied incentives to comply with these

recordkeeping requirements and to prepare written records of its

investment advice. Failure by a registered investment adviser to

comply with the requirements of Rule 204-2 may result in an

enforcement action brought by the Commission in which the ' Commission would seek injunctive or other equitable relief, as

well as the imposition of sanctions, such as a censure,

~ suspension or revocation of the adviser's registration with the

Commission and monetary penal ties. Sanctions imposed in

enforcement actions are a matter of public record and, depending

on their severity, must be disclosed to clients and prospective

clients.3 Furthermore, as a practical matter, maintenance by an

adviser of written records of its ad~ice could protect the

adviser from spurious claims that it~ advice was not consistent

with its fiduciary duty to its clients.

The provision of investment advice by a broker-dealer is

subject to both the anti-fraud provisions of the Securities

Exchange Act of 1934 (the "1934 Act") and the Conduct Rules of

3Rule 206 (4) -4. In addition, a client or prospective client

may obtain from the Commission a copy of the adviser's registration

on Form ADV, which is required to contain informtion concerning

disciplinary proceedings against the adviser. Pursuant to Section

306 of NSMIA, a public system will be established to respond to

inquiries regarding disciplinary actions and proceedings ~gainst

investment advisers and persons associated with investment advisers.

Mr. John Fox

July 21, 1997

the National Association of Securities Dealers, Inc. ( "NASD ii) .4 Rule 2310 of the NASD's Conduct Rules requires an NASD member to

obtain certain informtion about, non- institutional customers

prior to recommending a transaction to them, including a

customer's financial status, tax-status, investment objectives

and such other informtion used or considered to be reasonable by

such member in making recommendations to the customer. Conduct

Rule 3110 (c) sets forth the recordkeeping requirements with

respect to customer accounts. 5 We suggest that you contact the

NASD directly at (202) 728-8953 (fax: (202) 728-8894) for more informtion. We hope this informtion is helpful. Please, contact Alison

M. Fuller in this office or me at (202) 942-0660 (fax: (202) ,942
9659) if you have further questions.

Very truly yours ~

~ )ttc ru: L(~,,
Karrie H. McMillan

Special Counsel

enclosures (w/air mail copy)

~
4The Commission enforces the obligation of a broker-dealer to

render suitable investment advice under Rule 10b-5 under the 1934 Act. A copy of the rule is enclosed ¥ith the air mail copy of this , letter. . Broker-dealers are exempt from the definition of investment

adviser set forth in Section 202 (a) (11) of the Advisers Act, provided that the performnce of advisory services by the broker￾dealer is solely incidental to the conduct of its business and the

broker-dealer receives no special compensation therefor. Broker-

dealers that do not qualify for the exemption are subj ect to

regulation under both the Advisers Act and the rules of the NASD.

Most broker-dealers are required to be members of the NASD.

5IM-3110 of the Conduct Rules addresses the recordkeeping

requirements relating to the informtion obtained pursuant to

Conduct Rule 2310. Copies of Conduct Rules 2310 and 3110 and IM￾3110 are enclosed with the air mail copy of this letter.

,- 19/(1, d 97 TH 10; 33 FAX + 61 2 9966 3295 LEGAL SECRETARIAT ~001 ,- -. MLC Facsimile To Karrie McMilan Fax Number 00111 202 942 9659 Company Securities a.nd Exchane ComJTission From John Fox Phone Number (612) 99578358 Fax Number Date is June, 1997 Total pages including cover Subject Requirements to maintain records of advice (Our Ref: 9/3, 9/10) Please telephone If the message you received was incomplete or ilegible. The information in this facsimile is confidential, and is intended only for the recipient named above. If you are not the intended recipient, any disseminaton, copying or use of the information in this facsimile is strictly prohibited. If you have receIved this communicaton in error, please immediately telephone (we wil accept reverse charges) and return the original facsimile to us. '

Dear Karrie,
Last year you kidl provided me with ilÛOl'mation about the regulation of securities advice in the United States. I would lie to again ask your help. ot Our insurance and securties regulators are concerned with the diculties faced by

customers in obtain compensation for damages sufered as a result of poor advice. In paricular, they are concerned with the diculties customers face in proving the

terms of the advice given to them.
It is now propose~l that our governing lègislation be amended to reverse the onus of proof. There is to be a preswnption that advice was not given at the required standard if an lCadèquate" written record of that advice is not produced by the agent or representative. The agent or representative wil be able to provide evidence of the

advice given so as to rebut the presumption.
I am writing to you On behalf of our industry orgaiusation, the Lue Investment and Superannuation Association of Australia, Inc ("LISAn). LISA opposes the proposed rebuttable presumption as an appropriate means of

promoting record keeping. It believes that other, less draconian, measures should be developed. MLC Limited ACN 000 000 402 105-153 Miler street North Sydney NSW 2060 Australia PO ß.)X 200 Nort Sydney NSW 2059

Austrlia
Telephone
02 9957 8000
Facsimile
02 9957 6881

OX 10579 North Sydney
,.'1 jf970141 ,doc

~,1~/O~ '97 TH 10: 33 FAX + 61 2 9966 3295 LEGAL SECRETARIAT ~002 .. 2 We seek your advice as to the requirement,') gover/tiny record keeping in your

jurisdiction' and would be obliged if you told u.s:

1. 'Whether there are any requírementsfor keep'ing record.') of
   advice in your jurisdiction; and
2. if so:
   (a) what the ter of those requirements are; and

(b) what incentives or deterrents apply in relation to compliance with those requirements.

Unfortunately, we expect that we wil only be given a very short time to consider the

legislation and so ask that yOU respond as soon as Dossible. My fax number is (612)

9966 3295.

Y OUtS Sincerely

':.,
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JF90141