SEC Division of Investment Management staff letter: R. Bryan Stoker

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20549

JIVISION OF
May 13, 1994
INVESTMENT MANAGEMENT
'" _...-.-.'.,.',,; - .. ~..

R.
Lifestyle Publishinq

Bryan Stoker
---'xci,¿ '~',
P.O. Box 355
~-:- - a. o¡)p )( I1 ) ú)) ¡ LO () n'.
Dear Mr. Stoker: ) ;'~'J10 ---~, - """i, -2. II - - .. . A' ""1 Sykesville, MD 21784 ì:.,eck..Q!l --- _-- J ./ " ; !'

Your letter dated AP~¡:it_~i~1.:1i~g~~~~l!a'~~' Office for response. You state that you have authored and intend

to publish a book that discusses general financial planninq

concepts and describes the different categories of mutual funds

that are commonly available. You also plan to write a book about

investinq to plan for retirement. Finally, you state that you

may become a certified financial planner. You ask whether any of

these activities require that you register with the Commission

under the Investment Advisers Act of 1940 ("Advisers Act").

section 202 (a) (11) of the Advisers Act defines an investment
adviser as "any person who, for compensation, engages in the

business of advising others, either directly or throuqh publications or writings, as to the advisability of investinq in, purchasing, or selling securities, or who, for compensation and

as part of a regular business, issues or promulgates analyses or

reports concerning securities.
II If a person's activities satisfy

the elements of the definition, the person is required to

register under the Advisers Act unless the person qualifies for

an exception from the definition or is exempt from registration. 11

First we address your plans to act as a publisher and author

of the books you describe. Section 202 (a) (11) (D) excludes from

the definition of investment adviser, and thus from registration

and regulation under the Advisers Act, the publisher of any bona

fide newspaper, news magazine or business or financial

publication of general and regular circulation. In Lowe v. SEC, ~I

the United States Supreme Court interpreted the "publisher's

exclusion" to include those persons whose publications offer

impersonal investment advice to the general public on a regular

basis. To qualify for the Section 202 (a) (11) (D) exclusion, the

Court stated that the publication must be:

ii For example, Section 203 (b) of the Advisers Act exempts from

registration investment advisers who have fewer than 15 clients and do not hold the..iselves out to the public generally as investment advisers.

21 472 U.S. 181 (1985).

(1) of a general and impersonal nature, in that the advice provided is not attuned to any specific portfolio or

any client's particular needs;

(2) "bona fide" or genuine; and

(3) of general and regular circulation, in that it is not timed to specific market activity or to events

affecting, or having the ability to affect, the secur i ties industry. The staff generally declines to express an opinion on the

availability of the pUblisher's exclusion because of the fact-

specific analysis required to make this determination. ~I

The staff construes the definition of investment adviser not

to include an author whose writings: (1) do not contain advisory

information relating to specific securities or issuers; and (2)

are not one of a series of publications that the author intends

to update or supplement. sl The staff, as a general matter,

declines to express an opinion on whether this exclusion is

available to a particular author. 21

Finally, you state that you may, in the future, become a

certified financial planner. A financial planner generally meets the def ini tion of investment adviser and thus is required to register under the Advisers Act, unless he or she is exempt from

registration. In certain instances, however, financial planners can rely on the Act's exception for broker-dealers. ~I section 202 (a) (11) (C) of the Advisers Act excepts from the definition of investment adviser any broker or dealer, including a registered

representati ve of a broke~-dealer, who performs investment

advisory services that are incidental to the conduct of his or

her broker-dealer business and who receives no special

compensation for its advisory services. The broker-dealer

exception is only available to a registered representative who

provides investment advisory services to clients wi thin the scope

~I See,~, Independent Drug Wholesalers Group, Inc. (pub.

avail. Apr. 16, 1992).

41 See Investment Advisers Act ReI. No. 563 (Jan. 10, 1977).
21 See Gilbert L. Delugach (pub. avail. Sept. 18, 1986).
61 See generally, Advisers Act ReI. No. 1092 (Oct. 8, 1987) (discussing the applicability of th~ Advisers Act to

financial plannerß) ("Release No. 1092").

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of his or her employment with the broker-dealer. 21 If a

registered representative provides advice independent of, or

separate from, his or her broker-dealer employer by establishing

a separate financial planning service or otherwise, the person

may not rely on the exception because his investment advisory

business would not be subject to control by his or her broker- dealer employer. 81 Therefore, if you act as a financial planner independently of your association with The Travelers, you

may not rely on the broker-dealer exception.

I hope this information is helpful. If you have further

questions, you may write or call this Office at (202) 942-8945.

Sincerely,
Jana M. Cayne tl1A J1 - C~iL
Attorney
Office of Chief Counsel

7/ See Nathan & Lewis Securities, Inc. (pub. avail. Apr. 3,

1988) .
81 Release No. 1092.

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~ Lifestyle Pu6ûsfiing P.O. '11(35~ S!J!¿esvi1 MÐ 21784 2 Apri 1994 Securities and Exchange Commssion 450 Fifth Street, N.W. Washigton, DC 20549 Subject: Request Guidance Regarding Investment Advi Registration Applicabilty Gentlemen:
Ths letter is a request for guidance regarding whether or not I have to become registered as an Investment Advisor. I have already reviewed your publications, Investmnt Advisers Act oj 1940 revised as of October 1991, and Investment Adviser Registration Package updated August 1993 and it is still not clear whether I neeclo register as an investment advisor in my parcular situation. I curently work ful-time as a senior electronics engineer for the Defense Deparment of the U.S. Government. Recently, I also joined Prria Fiial Services (PFSJ as a par-tie representative. PFS is a

subsidiai of Prria Corporation (which recently changed its name to

Th Travelers upon buYig the company previously holding that name). I have taken and passed the series 6 and 63 exams. My primai involvement with securities' wil be in assisting clients with personal financial management including recommending and sellg mutual fuds

marketed by PFS. I understand that under ths arangement, I do not need to be registered as an Investment Advisor. My question arses from the fact that prior to joining Prria Fianial Services lPFS) , I start.ed a sole proprietorship publishing company called Lifestyle Pulishin; Lifestyle Pulishin is, and will

continue to be, completely separate from my activities with PFS. Therefore. I do not believe I am excluded as "any broker or dealer whose performance ... is solely incidental to the practice of his profession." I understand that the Investment Advisers Act of 1940 (IA of 1940)

excludes "publishers" from the definition of an Investment Adviser.

However, I also authored the first book I intend to publish; ths book is

caled Fiia Freedom.

FuaTlia Freedom is a non-periodical publication for which I wi only receive the profit from the sale of the book (i.e., no additional advice will be provided, and no additional compensation wil be received in connection with the book). FiaTlial Freedom priarly discusses

general financial planning concepts with no specific securities recommendations. The only par of the book that discusses securities or "the advisability of investig in securities" is a general discussion of the tyes of mutual fuds (e.g., growt, aggressive growt, income, balanced, etc.), a brief discussion of what mutual funds are, and that the reader may want to investigate them fuer. I have attached the porton of the book that discusses mutual funds for your reference. Does ths book fal

under the "advisability of investing in securities" definition provided in the IA of 1940? Considerig that I do plan to wrte additional books in the future. does this book fall within the scope of "engaging in the

business of advising others" as defined in the IA of 1940? I do not intend to "hold myself out generally to the public as an investment

adviser" in connection with Lifestyle Publishin; my only involvement with the public, other than to sell books, wil be as a representative for Prria Fiial Services. . In the future, I plan to write another book that will discuss

retirement and investing to prepare for retirement. This book will discuss investment strategies including asset allocation among mutual fund tyes as well as how to select those fuds; no specific funds wi be recommended. This book will also discuss investing in Keogh plans, IRA, and pension plans. Do I need to be registered as an investment adviser for authorig and publishig such a book? My first book, Fiia Freedom, is about to go to pritig and my

official publication date is registered as June 1994. I do not realy feel that I have to be registered as an investment adviser for my first book, Fiancial Freedom, under the intent of the IA of 1940. However, if you decide that my first book does fal under the auspices of the IA of 1940, I will have to hold up the priting and publication schedule until I

become registered. However, if you decide that I should be registered due to the second book I intend to wrte, and not for the first book I have already wrtten, please indicate ths so I can go ahead with my curent publication schedule. Finally, I am also considering becoming a Certfied Financial Planner or Charered Financial Consultat a few years from now. If I do pursue one of the certcations and begin workig in that capacity, wi I need to be registered as an investment adviser at that tie.

Than you for tie and interest.
R. B an Stoker

.

EncL. (1)

"
Extraction from Chapter 5:
Since there is a good chance you will never have to pull out more than one month's wort of expenses from your emergency reserves, you may want your money to

work even harder for you by investing in other vehicles with potentially higher returs.

A good exam ole of this tye of investment would be no-load mutual funds (discussed in appendix Fl. Whether you decide to go for higher returns or not depends on how comfortable you are with the slightly higher risk. Regardless of what you decide, you will probably want to put your first month's wort of emergency reserves in a money market account for safety and maxmum liquidity. Appendi F - Investig in Mutua Fuds This appendix is provided to give you an idea of what mutual funds are and the mechanics of purchasing shares in a mutual fund. This appendix will not go into depth on mutual funds and how to pick the right funds for you; entire books have been dedicated to that topic. In fact, three of them have been listed in the references in
appendix M.
Before discussing how to invest in mutual funds, you need to know what a mutual fund is. When multiple investors pool their money together to invest in stocks, bonds, real estate, gold, etc. via an account managed by a professional investment manager, they have created a mutual fund. Investors buy shares in the securities owned by the fund just like buying stock shares of a company. The big difference between shares of stock and shares of a mutual fund is when you own a mutual fund share, you actually own a fraction of all the shares owned by the fund. For example, if you bought one share of a mutual fund that invested in McDonalds, IBM. and Centerior Energy, you would actually own a fraction of a share of stock in McDonalds, IBM, and Centerior Energy. Therefore, by the nature of mutual funds, you are automatically diversified when you own shares in a mutual fund. You can buy and sell shares of a mutual fund at any time just like you can with stock. However, some funds have one or more of the fOllOwing tyes of fees: sales loads, redemption loads, and 12b-l fees. Some of these fees go as high as 8.5% of your initial investment. A sales load is effectively a commission you pay when you buy shares in a mutual fund. For exaple. if a fund has a 2% sales load and you invest

$1,00, you will pay a fee of $20, and only $980 will be invested. A redemption fee is effectiely a commission you pay when you sell shares in a mutual fund. For exaple, assume you bought $1,00 wort of shares in a mutual fund with a 4% redemption fee. If your $1,00 investment went up to $3,000 over the time you owned the shares, you would get back $2,880 if you sold your shares (i.e., all but $120). A fund that has a sales fee or redemption fee is considered to be a "Load Fund." "No Load" funds, legaly speak, do not have sales loads or redemption loads. However, some funds have 12b￾1 fees to cover advertiSing costs, etc. 12b-l fees are often called "hidden loads."

There are several categories of mutual funds in which you may invest. These categories are briefly discussed below. The Individual Investor's Guide to No-Lod Mutual Fu, by the American Association of Individual Investors provides a much more detaied discussion of these categories as well as systematic methods of selectig funds. .;"

• Agressive Growt Funds: i¡~(¡ ~ RECEIVED .
  Objective - Agressive growt funds tyically invest in common stocks to c ieXfñR 18 0 maximum capital gains. These funds may also engage in sp atttl L94 leveraging and options. ~..

Risk - Aggressive growth funds are considered very high risk in the short .Lt large price swings are exected. ~(¡

Profit Potential - If you can aford to remain invested for years, this tye of fund generally provides the highest profit potential of al fund tyes.

• Grow Funds

Objective - Growt funds tyically invest in larger, growt-oriented companies to achieve long-term capital growt. These funds normally do not engage in speculative leveraging.

Risk - Growt funds are generally considered medium to high risk, but not as high risk as agressive growt funds. Profit Potential - The return for this tye of fund tyically tracks the overall market growt.

• Growt and Income Funds

Objective - Growt and income funds tyically invest in common stocks for growt as well as income-generating securities. There goal is to offer long-term growt along with current income. Risk - This tye of fund is tyically considered less risky than growt funds because of the curent income feature. Profit Potential - The profit potential of growt and income funds is good, tyically middle of the road. The decrease in long-term growt with respect to growth funds is offset by the short-term income.

• Balanced Funds
  Balanced funds are also called equity-income, income, and tota-return funds. Objective - Balanced funds invest in both common stocks and bonds. Similar to growt and income funds. balanced funds have some potential for long-term growt and higher short-term income. Risk - Balanced funds are considered to have medium to low risk like "growt and income" funds.

Profit Potential - Balanced funds have about the same profit potential as "growt and income" funds.

• Bond Funds
  Objective - Bond funds invest in bonds to generate current income. Tax-exempt bond funds also exist to generate tax-free income. Risk - Bond funds tyically range from very low risk (for Government security bond funds) to high risk (for low-rated corporate and municipal bond funds: these funds tyically have "high-yield" in their name).

Profit Potential - Bond funds tyically have lower profit potential than stock funds.

• International Fuds
  Objective - International funds invest in foreign stocks and bonds to counteract slumps in the U.S. economy and to tae advantage of booms in foreign

economies.
Risk - The risk level of international funds vares significantly from fund to fund depending on location, geographical diversity, strength of the American dollar, and foreign pol1tics. Profit Potential - International funds have the potential for high gain as well as high loss.

• Other Fuds
  Objectie - There are many other tyes of funds including precious metal funds (e.g., gold funds, silver funds, etc.) and sector funds which invest in single areas of business (e.g., health companies, leisure. companies, fiancial companies, and high technology companes).

l '.
Risk - The risk for such funds vares tremendously from fund to fund, but it is generally considered very high at least for sector funds. Profit Potential- For sector funds, the profit potential is very high. You can make a lot of money if you happen to be invested in the right industr at the right

time. Similarly, you can lose a lot of money or not ear anything at all in these tyes of funds over the short term. How to Buy a Mutual Fund:
The mechanics of buyig shares in a fund is fairly easy. There is no need to pay a broker a commission to buy one for you if you know which fund you want to buy. Just look at the advertisements or fund listings in the financial magazines such as Money, Kiplier's Persona Fie, Fort or Your Money. These advertisements and

listings usually list an "800" number for the fund. Just call the "800" number and ask for a "prospectus." The prospectus describes the objectives. rules, and past performance of the fund. When you receive the prospectus, read it carefully to veri that it corresponds to your personal goals and desired level of risk. Specifically. look for the followig:

• Sales Loads

• Redemption Loads

• 12b-l Fees

• Exense Ratios

• Investment Objectives

• Past performance results

• Minimum initial
  investment

• Automatic investment progras
  As previously mentioned, it is recommended that you refer to some of the books listed in
  appendix M before investin in mutual funds. The followig guidelines are presented to
  help you get stared:

• Carefully consider the following tyes of fees: - Sales Load

• Redemption Load
  !

• 12b-l fees

• Management fees If you are a short-term investor, the one-tie fees will have more impact on
  your investment. If you are a long-term investor, the annual fees will tyically have a larger impact on your investment.

• Look for a decent performance when annualized over the past three to five year. Consistent growt in performance over the past thee to five year or
  more is considered excellent.

• You may also want to consider automatic monthly investig. Most funds offer this program. What the program alows you do to do is automaticaly invest
  $50 or $100 (or however much you want above the stated minimum) every month on the same day. Automatic investing makes use of a concept known as "dollar cost averaging," and it can increase your long-term return by a percentae point or so. The idea is as follows: one month, the share price may be high, so you wil buy fewer shares with your $50 investment. The nex month, the share price may be lower allowing your $50 to buy more shares. The net effect of this concept is that you automatically buy more shares when they are lower priced which is the basis of "Buy low, sell high." Once you have decided which fud, or funds, 'you want to buy, simply complete the application (you will receive an application with the prospectus), and send it along

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with a check for the minimum initial investment or more to the company. That is all there is to it. How to Select Mutual Fuds:
The above guidelines discuss the mechanics of buyig shares of a mutual fund.

Proper selection of mutual funds is a topic that requires a book of its own. The best book I have found on the selection of mutual funds is Mutua Fu WealthbuUr by Michael Hirsh. I

highly recommend that you refer to this book prior to investing a mutual fund for guidelines on desirable and undesirable features in a mutual funds. If you do not want to research mutual fund investing. then you may want to consider selecting a money market account if you do not like risk. If you are willng to accept a bit more risk, then consider "Balanced Funds" with good penormance over the last three year. Also. make sure the fund stil has the same manager it had over each

of the past three years. You can determine the three years of penormance and the manager information by calling the fund's BOO number and askig them. .