SEC Division of Investment Management staff letter: United Missouri Bank of Kansas City

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Our Ref. No. 89-733-CC
.~ ~¡I. ~." :-.::: ~. United Missouri Bank of Kansas City, n. a. RESPONSE OF THE OFFICE OF CHIEF COUNSEL File No. 132-3 DIVISION OF INVESTMENT MANAGEMENT

Your letter, dated November 20, 1989, requests our assurance

that we would not recommend any enforcement action to the

commission with respect to the offering of discretionary

investment management accounts (the "accounts") as described in

your letter without registration of such accounts under the

Investment Company Act of 1940 (the "1940 Act") and without

registration of such accounts and services provi~ed in connection

with them under the Securities Act of 1933 (the "Securities

Act") .
You state that United Missouri Bank, n.a. ("UMB"), a full-

service national banking association, proposes to provide

custodial and recordkeeping services to clients of a number of

unaffiliated investment advisers ("Advisers" or, individually;",

"Adviser") registered under the Investment Advisers Act of 1940"

("Advisers Act") in connection with accounts established by the

clients through the Advisers. Each client would enter into an

investment advisory agreement with the client's Adviser and a

custody agreement with UMB and would ppen an account with UMB

(not in the form of a trust account) .; 1/ On the basis of the individual needs of the client, the Adviser would recommend

..ther registered investment advisers (the "Managers" or,

individually, "Manager") to the client. and provide the client

with essential information about each such Manager. The client

would then select a Manager to whom the client would grant

discretionary trading authority over the securities and assets in

the client's account.

The Adviser will not permit any person to open an account if

it determines that the client has chosen a Manager whose

approach is not appropriate for that client in light of his

stated financial situation, investment goals and obj ectives and

other needs. Once an account is opened, the client will be

permitted to maintain that account only so long as the Adviser

determines that the Manager's approach and corresponding type of

investments are appropriate for the client. In a telephone conversation with Hope Lewis of the staff on April 4 i 1990, David Tucker of your firm confirmed that the Manager will make no

investments for any client until .after the Adviser has

determined, in the manner described in your letter, the client iS

individual needs, investment obj ectives, and special

1/ Your letter states that UMB will be acting solely as custodian with respect to client accounts.

EXFÎIB IT A

instructions, and the Aàviser hAs concluded that all of the

investments to be made for the client's account will be suitable. Y The Adviser would receive current information with respect

to all transactions in the client's account and would receive

duplicate copies of all confirmations and reports sent to

clients. The Adviser would also maintain frequent communication

with the Manager in order to monitor and evaluate the Manager

with respect to consistency of strategy, approach, and key

personnel. The Adviser would close an account if it determines

that a client's current financial situation or individual needs

are inconsistent with the Manager's approach or the particular

investments held in the account. You state that each client

would receive individualized treatment from the Adviser, retain

ownership of each security in its Account, and receive "prompt,

transaction by transaction confirmations of each transaction in

(its) Account, monthly statements of account, and quarterly

performance reports." Each client will receive a brochure with

respect to both the Adviser and Manager that meets the

requirements of the brochure rule, Rule 204-3 under the Advisers

Act. with respect to acting as custodian, UMB would maintain

individual custody accounts and records identifying each client

as the individual owner of the securities purchased for that

client's account. Eligible securities would generally be held

through UMB' s account at The Depository Trust Company. Clients

will provide instructions to UMB regarding the investment of cash

balances in the account pursuant to the custody agreement. UMB

intends to aggregate orders for client investments of cash

balances and to hold such investments in the name of UMB or its

nominee for the benefit of the clients.

It is anticipated that clients will generally instruct UMB

to use cash balances to purchase shares of a money market fund

for which UMB acts as custodian ("UMB Fund"), although the cl ient

may elect to have cash balances invested in an unaffiliated money

market fund. li You assert that the proposed arrangement, which

y See Manning & Napier Advisors, Inc. (pub. avail. Nov. 22,

1989) (individualized discretionary investment management

service provided by a registered investment adviser and its

sub-adviser) . li You should note that, if temporary investments in money market funds cannot be said to have been within the

contemplation of an investment adviser and its client, l.g.,

if it was contemplated that the adviser for its fee would

provide all the investment advisory services for the (continued. . . )

I involves the investment of a client's assets in shares of a money market fund, is distinguishable from the arrangement in Ball iet, Blackstock & stearns, Inc. (pub. avail. Aug. 19, 1987)

("Ballietl'). In Bailiet, the staff declined to take a no-

action position with respect to the use by an advisory firm of

nominee accounts with various mutual funds as discretionary

vehicles for the firm's clients where the advisory firm, acting

as custodian, also would hold client securities in nominee name

and provide substantially similar advice to client accounts.

The arrangement suggested the possibility of "pooling" and the

functional equivalent of a "fund of funds." In support of your

argument, you note that: each client itself will provide

instructions on where to invest cash balances; neither the

Adviser nor the Manager will have any discretion with respect to

the investment vehicle chosen for the investment of cash

balances; and UMB has no discretion with respect to any client's

investments. ~ In addition, in a telephone conversation with

II ( . . . continued) management of the client's account, the use of any money

market fund, affiliated or not, for temporary investments

would be unauthorized and in violation of section 206 of the

Advisers Act because it would result in the client's paying

twice for the same service. See E. F. Hutton & company, Inc.

(pub. avail. Nov. 17, 1983).

section 206 of the Advisers Act, in relevant part,

makes it unlawful for any investment adviser, by use of

the mails or any means or instrumentality of interstate

commerce, to engage in any transaction, practice, or

course of business which operates as a fraud or deceit

upon any client or prospective client or to engage in

any act, practice, or course of business which is .

fraudulent, deceptive, or manipulative.

lI See National Deferred Compensation, Inc. (pub. avail. Aug. 31, 1987). In that letter, National Deferred Compensation,

Inc. ("NDC") and related entities established and

administered certain employer-sponsored payroll reduction or

deduction plans in which a participating employee would have

the option of investing in fixed annuity contracts, variable

annui ties, or no-load mutual funds. NDC requested the

staff's assurance that it would not recommend enforcement

action if the arrangement was not registered as an

investment company under the 1940 Act. As part of the

arrangement, a registered investment adviser would provide

individualized advice to participants, participants'

accounts would be separately and individually maintained by

a custodian (that would hold client shares in nominee name),

and each participant would retain the right to withdraw, (continued. . . ) l i ¡ j i i J i I

Hope Lewis of the staff on April 23, 1990, David Tucker of your

firm confirmed that, on a daily basis, UMB will sweep all cash

lances in a client's account into the money market fund chosen

Á the client and not into any other kind of investment (such

as, for example, certificates of deposit, overnight repurchase

agreements, or banker's acceptances). 2/

certain Advisers that are also registered as broker-dealers

or representatives of registered broker-dealers may act as

"broker of record" (l.g., as introducing broker) with respect to

their clients' securities transactions. Those Advisers will

receive trade instructions from the Managers and, subj ect to the

Adviser's fiduciary duties and monitoring function, will place the transaction orders with a clearing broker. 2/ You state that any Adviser that acts as broker of record also will provide

separate disclosure regarding the potential for adverse interests

and conflicts of interest and will obtain the client's written

~ ( . . . continued) hypothecate, vote, or pledge the securities in his or her

account. The staff granted no-action relief based on the

facts and representations in that letter, particularly

that, except for the custodian's limited discretion to

redeem mutual fund shares to pay expenses, neither the

adviser nor its related entities would have discretion to

make initial investments or to change investments.

'/ In a telephone conversation with Hope Lewis of the staff on May 7, 1990, David Tucker of your firm represented that no

Adviser or Manager would invest a client's assets in a UMB

common trust fund. -.
§j In general, investment advisers that are also broker-dealers

or registered representatives of broker-dealers have a duty

to inform their investment advisory clients of their ability

to seek executions' of transactions recommended by them

through broker-dealer firms other than the one with which

they are associated. See Don P. Matheson (pub. avail.

Sept. 1, 1976). See also Investment Advisers Act ReI. No.

1092 (Oct. 8, 1987) ("Release 1092") (discussing the

applicability of the Advisers Act to financial planners).

If, in the course of rendering advisory services, an

investment adviser recommends that a client effect

transactions through its broker-dealer employer, the

applicable antifraud provisions of the federal securities

laws require full disclosure of the nature and extent of all

adverse interests, including the amount of any compensation

the adviser will receive from its broker-dealer employer in

connection with such transactions. See Release 1092; David

P. Atkinson (pub. avail. Aug. 1, 1977).

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consent prior to the commencement of such an arrangement. The

Manager will have the authority to use an unaffiliated broker if

necessary to obtain best execution.

The Advisers that act as brokers of record will receive a

portion of the related brokerage commissions. 11 It is expected

that Advisers that do not act as broker of record will receive an

asset-based fee from the client. Advisers that act as broker of

record mayor may not receive such a fee in addition to a portion

of the related brokerage commissions. The Manager is compensated

based upon a percentage of assets under management. UMB' s fees

are paid by the client and may be based upon a percentage of

assets under custody or the number of transactions in the client i s account. Each prospective client will receive brochures from the Adviser and the Manager, related agreements, the UMB

Fund prospectus (or that of another money market fund selected by

the client), and informational materials that describe the

material features of the account, including all fees that will be

charged to the client and the fees that UMB receives as custodian

of the UMB Fund. ~ In a telephone conversation with Hope Lewis

11 You have not requested, nor do we express, any opinion on whether the proposed brokerage arrangements would satisfy

the duty to obtain "best execution." We note, however,

that an investment adviser has a fiduciary relationship with

its clients that requires fair dealing, in general, and

disinterested advice, in particular. This requires at a

minimum that the investment adviser have a reasonable belief

that a transaction recommended by the adviser is in the

client i s interest. See, for example, subparagraph (c) of

Rule 206 (3) -2 (the agency cross transaction rule), which

provides that the rule shall not be construed as relieving

the obligation of an adviser to act in the best interests of

the client, including the duty to obtain best price and execution. Section 206 of the Advisers Act requires that the fee arrangement described in your letter be disclosed to

the client to enable him to evaluate the investment

adviser's motivation in giving the advice. See SEC v.

Capital Gains Research Bureau, 375 U.S. 180 (1963); Arleen

W. Huqhes, 27 SEC 629 (1948); Robert Cashmore Associates

(pub. avail. Sept. 28, 1983); Rocky Mountain Financial

Planning, Inc. (pub. avail. March 28,1983) .

~ Because of the multiplicity of fees present, we think it important to note that the staff believes that an investment

adviser who charges a fee for his services larger than that

normally charged by other advisers (taking into

consideration factors such as the size, location, and nature

of the advisory businesses to be compared) has a duty to

disclose to his clients that the same or similar services (continued. . . )

of the staff on April 23, 1990, David Tucker represented that all

fees associated with the proposed arrangement, including advisory

fees, brokerage arrangements, custodial fees (including the

custodial fees that UMB earns from the UMB Fund), and money

market fund fees, will be disclosed to each client in one

document in one place.

It is contemplated that an Adviser that has made

arrangements with its clients to act as broker of record will

generally effect securities transactions on behalf of those

clients, provided that the Manager agrees that execution is

acceptable and brokerage and research services are reasonable in

relation to the price paid for such services. 21 In a telephone

conversation with Hope Lewis of the staff on April 23, 1990,

David Tucker of your firm confirmed that each Manager will

exercise its fiduciary duty to obtain best execution of each

client's transactions under the circumstances of the particular

transaction even if to do so would require the use of a broker

other than a client's broker of record. You represent that there

will be no agreement between the Adviser and the Manager

regarding the number of securities transactions that must occur

in an account and the Adviser will annually provide the client

~ ( . . . continued) may be available at a lower fee. See Shareholder Services

Corp. (pub. avail. Feb. 3, 1989); Alan E. Pekelner (pub.

avail. June 6, 1977). We believe that all fiduciaries that

are a party to these arrangements must consider the

aggregate fees and services in observing this duty.

21 The staff has expressed the opinion that section 28 (e) of the Securities Exchange Act of 1934 ("EXchange Act") was not

intended to exclude from its coverage the payment of

commissions made in good faith to an introducing broker for

execution and clearing services performed in whole or in

part by the introducing broker's normal and legitimate

correspondent. Becker Securities Corp. (pub. avail. May

28, 1976). with respect to such correspondent

relationships, the staff contemplated that the "introducing

broker would be engaged in securities activities of a more

extensive nature than merely the receipt of commissions paid

to it by other broker-dealers for 'research services i

provided to money managers." Data Exchange Securities (pub. avail. April 20, 1981). See also Securities Exchange Act

No. 23170 (April 23, 1986) (interpretive release

concerning the scope of section 28 (e) of the Exchange Act

ReI. and related matters); SEI Financial services (pub. avail. Dec. 14, 1983) (broker correspondent relationship that

involved the provision of certain services did not preclude

reliance on section 28 (e) ) .

. , I ' with the account's portfolio turnover rate and the amount of

brokerage commissions incurred, stated as a dollar amount and as

1 percentage of assets under management. You also represent that the use of an Adviser as broker of record is subject to the

Adviser's and Manager's determination and reasonable belief that

the arrangement is in the client i s interest and that the client

could reasonably benefit from the arrangement, consistent with

the degree of knowledge each of them possesses regarding the client's individual needs, as discussed above. 1Q You state that the Advisers that use this arrangement generally believe

that their involvement in the portfolio securities trading

function enables them to provide the added benefit of monitoring

their clients' accounts more closely 11/ at a transactional cost

to their clients that will generally be no more than transaction

charges that the client would otherwise incur for the same level

of brokerage, execution, and research services provided outside

of the arrangement. 12/

1Q Generally, if a client chooses to direct its brokerage to a broker other than the one through which the client iS adviser will execute orders for its other clients, the

adviser must disclose to that client that the client would

forego any benefit from savings on execution costs that the

adviser could obtain for its other clients through, for

example, negotiating volume commission discounts on batched

orders. See Mark Bailev and Co., Investment Advisers Act

ReI. No. 1105 (Feb. 24, 1988).

11/ It is our understanding that each Adviser, whether or not

it acts as broker ~f record, would "be completely up-to￾date as to all transactions in the Client's Account" and

would close an account if it determines that the client iS

current financial situation or individual needs are

inconsistent with the approach of the Manager of the client i s account or the particular investments held in the account. 11 Cf. Investment Company Act ReI. No. 10740 (June 20, 1979)

(rescinding Rule 17e-l under the 1940 Act); Investment

Company Act Rel. No. 10606 (February 27, 1979) (proposing

rescission of Rule 17e-l under the 1940 Act); Securities

Exchange Act ReI. No. 13662 (June 23, 1977) ("Release 13662") (discussing off-board trading restrictions) . Release 13662 cites Thomson & McKinnon, 43 SEC 785 (1968),

and Delaware Manaqement Companv, Inc., 43 SEC 392 (1967),

for the proposition that an investment adviser is prohibited

from interpositioning a broker-dealer between a pool of

assets managed by him and a market maker in s i tua tions where that broker or pool of assets could deal directly

with the market maker on as favorable a basis and the (continued. . . )

Finally, to aid the staff in monitoring the implications of

the provision of the services described in your letter, you have

~greed that UMB will provide to the staff promptly, upon request,

the names of the Advisers and Managers that participate in these

arrangements.
We would not recommend any enforcement action to the

commission if the proposed accounts are offered as described in

your letter without registration under the 1940 Act provided

tha t :
(1) Except with respect to the investment of cash balances in the money market fund chosen by the client (as more

fully described in your letter), the securities in a

client's account would be held in nominee name by the

custodian only for ministerial purposes (such as

facilitating security transactions) ;

(2) UMB will record, and keep track of, on a client-by client basis, the securities each client beneficially

owns;
(3) A c~ient i s beneficial interest in a security does not represent an undivided interest in all the securities

legally held by the custodian with respect to these

accounts, but rather represents a direct and

beneficial interest in the securities held in that client i s account; (4) Each client will retain any available rights under the federal securities laws to proceed directly against the

issuer of any underlying security in its account and

would not, because of participation in the arrangement,

be obligated to join UMB, the Adviser, the Manager, or

any other beneficial owner participating in the service

as a condition precedent to proceeding against any issuer; 12/ (. . . continued) interpositioned broker performs no bona fide function in

connection with the transaction. The decis ion in Thomson &

McKinnon states that, where a broker "interposes another

broker-dealer between himself and a third broker-dealer, he

prima facie has not met" the obligation to obtain the most

favorable price for his customer and he has "the burden of

showing that the customer i s total cost or proceeds of the

transaction is the most favorable obtainable under the

circumstances." 43 SEC at 789.

~~..':.

(5 ) Each client will receive notification of each

transaction in its account as described in your letter

and has the absolute right to withdraw, hypothecate,

vote, or pledge securities in its account and may close

its account at any time;

(6 ) The Advisers and Managers will perform the

individualized investment services described in your

letter; and

(7 ) Except with respect to the investment of cash balances

in client accounts in shares of a money market fund

chosen by each client (as more fully described in your

letter), the arrangement will not involve

recommendations concerning, or the purchase and sale

of, shares of investment companies. ld

Because our position is based on the facts and

representations in your letter and in your telephone

conversations with the staff and on the conditions listed above,

you should note that any different facts or circumstances may

require a different conclusion. Further, this response expresses the Division i s position on enforcement action only and does not purport to express any legal conclusions on the issues presented.

The Division of Corporation Finance ("Division") has asked

us to inform you as follows. Based on the facts presented, the

Division would not recommend enforcement action to the Commission

if UMB, in reliance upon your opinion as counsel that

registration is not required, offers the accounts and services in

the manner described in your letter without compliance with the

registration provisions of the Securities Act.

Because this position is based. upon the representations made

to the Division in your letter, it should be noted that any

different facts or conditions might require a different

conclusion. Further, this response merely expresses the

Division i s position on enforcement action and does not purport to express any legal conclusion on the question presented.

~l4.J ~~~
L. Hope Lewis

Attorney
11 See Balliet.

~23æ
P dJ I ~ ~ Our Ref. No. 92-577-CC
. L,n~. Uni ted Missouri Bank
RESPONSE OF THE OFFICE OF CHIEF COUNSEL of Kansas City, n. a. DIVISION OF INVESTMENT MAAGEMENT File No. 132-3

By letter dated January 23, 1995, you asked the staff to

modify the no-action relief provided in United Missouri Bank of

Kansas City, n.a. (pub. avail. May 11, 1990) ("Prior Letter").

In that letter, the Division of Investment Management stated that

it would not recommend that the Commission take any enforcement

action if discretionary investment management accounts for which

United Missouri Bank of Kansas City, n.a. ("UMB") provided

custodial and recordkeeping services were not registered under

the Investment Company Act of 1940 ("1940 Act"). lj As described

in the Prior Letter, UMB holds clients' securities in nominee

name. You state that the discretionary investment management

program currently does not make available investment company

shares for purchase or sale. Z/ One of the investment advisers

who participates in the program now wants to recommend that its

clients invest in shares of investment companies. Accordingly,

UMB requests that the staff modify the Prior Letter to permit UMB

to hold investment company shares in nominee name.

You state that UMB would reduce custodial costs and improve

service by maintaining an omnibus account with each investment

company whose shares would be available for purchase through the

program. UMB would separately maintain records indicating the

beneficial ownership of each client. Clients would retain all

indicia of ownership of their investment company shares.

Specifically, (1) clients would receive confirmations of each

transaction, monthly account statements, and quarterly

performance reports; (2) UMB would ensure that clients receive

prospectuses and periodic reports; (3) UMB would ensure that

clients receive proxy statements in a timely fashion and would be

able to vote their shares; and (4) clients would be able to

terminate their account(s) at any time and liquidate their

holdings.
In Balliet, Blackstock & stearns, Inc. (pub. avail. Aug. 19,

1987) ("Balliet"), the staff took the view that holding

investment company shares in nominee name suggested a pooling,

and when coupled with investment discretion and the offering of

substantially similar investment advice, it suggested the

lj The Division of corporation Finance also stated that it would not recommend enforcement action to the Commission if

UMB offered the accounts and services as described without

registration under the Securities Act of 1933.

1/ The only exception is that program clients are permitted to

direct their cash balances to be invested in money market

funds.

functional equivalent of a fund of funds. 1/ You state that

UMB's situation is distinguishable from that in Ball iet because

UMB is an independent third-party custodian and does not have investment discretion with respect to the cl ients' accounts. We have reconsidered the Balliet letter, and have determined

that the position taken in that letter regarding the holding of

investment company shares in nominee name no longer represents

the views of the Division. Therefore, we would not consider a

discretionary investment management program that makes available

for purchase investment company shares to be an investment

company solely because those shares are held in nominee name.

Our position is based on our acknowledgement that nominee name

arrangements generally are administrative mechanisms for

recording and facilitating transfer of ownership, and on the

Commission's policy of encouraging the holding of securities in

nominee name to promote the establishment of centralized

clearance and settlement systems and the elimination of

certificated securities.!/ Further, we believe that this

posi tion applies to any discretionary investment management

program regardless of which entity holds the investment company

shares in nominee name.

Accordingly, we would not recommend enforcement action to

the Commission if UMB modifies the arrangement described in the

Prior Letter to include the purchase and sale of investment

company shares, provided that the arrangement is otherwise

operated in accordance with your January 23, 1995 letter and the

Prior Letter.

The Division of Corporation Finance has asked us to inform

you that, based on the facts presented in the January 23, 1995

letter and the Prior Letter, it would not recommend enforcement

action to the Commission if UMB, in reliance on your opinion of

1/ The staff subsequently has granted no-action relief to

discretionary investment management programs that offer for

purchase investment company shares only if the shares are

held directly in each client's name. See WestAmerica

Investment Company (pub. avail. Nov. 26, 1991); Rushmore

Investment Advisers, Ltd. (pub. avail. Feb. 1, 1991).

!/ See Final ReDort of the Securities and Exchanqe Commission on the Practice of Recordinq the OwnershiD of Securities in

the Records of the Issuer in Other Than the Name of the

Beneficial Owner of Such Securities (December 3, 1976).

counsel that registration is not required, offers the accounts

and services described in your letters without compliance with

the registration provisions of the Securities Act of 1933.

/J " drt UÁ In. LQ~1.

/Jana M. Cayne

Attorney

'liAION &
ARHALLC
ATTORNEYS AT LAW

Foundd 1887

By IN %t:on

1010 Grad Avenue

Ka City Miouri
64106-2271
816-842-3132
Facsime
816-842-1247
Direct Dial
Kasas Offce

130 N, Cherty

• "', Box 550
  he, Kasas 66051
  913-782-2350

Facsimile

913-782-2012

~m;.....v...i"" ~:;. -T--.~AlYWvi-.- .
VIA TELECOPY: 202-504-2395 ::;,1 ~ëA ~. 4; , Ms. Jana Cayne 'i:2ction Securities and Exchange CommIssiort .' ~¿ _ J / 450 Ffth S Ru1\1 ¿f. T- 1 treet ".::';:Ii ' - l 1/);2 / /J ,/ Washington, D.C. 20549-1004 ....~:~;~~:l.~~~:~'!--hi~ ,~__",.",..,,;.,..-...., RE: Ref. No. 89-7633-CC

UMB Bank, n.a., formerly known as United Missouri Bank of

Kansas City, n.a.,

File No. 132-3: Requested Amendment

Dear Ms. Cayne:

Enclosed per your request is a copy of the letter we originally sent in the above-referenced matter on September 28, 1992, dated as of today's date. We look forward to receiving the response via telecopy today as you indicated. If you have any questions, please feel free to call me. Sincerely, WATSON & MARSHALL L.c. l)d- ~ Diane M. Beers

DMB/om
Enclosures

\lIATON &
\RHALLC
ATTORNEYS AT LAW

Foundd 1887
By IN. Wítion

1010 Grad Avenue

Ka City Miouri
64106-2271
816-842-3132
Facsime
816-842-1247
Dir Dia

Ka Offce
130 N, Cherr
~" Box 550

ie, Kaas 66051
913-782-2350
Facsimile

913-782-2012

FEDERAL EXPRESS

Jack W. Murphy, Esq.
Office of Chief Counsel
1940 Act/
Section 3(a)
Division of Investment Management
450 Fifth Street
Stop 5-2
Washington, D.C. 20549-1004
Re: Ref. No. 89-733-CC
UMB Bank, n.a., formerly known as United Missouri Bank of Kansas City, n.a., File No. 132-3: Requested Amendment Dear Sir:
We represent UMB Bank, n.a., formerly known as United Missouri Bank of Kansas City, n.a., ("UMB"). By letter dated May 11, 1990, the staff of the Divisions ofInvestment Management and Corporation Finance (the "Divisions") granted certain no-action assurance to UMB with respect to the offering of discretionary investment management accounts, as described more fully in that letter (the "UMB Letter"), without registration of such accounts and the related services under the Investment Company Act of 1940, as amended (the "1940 Act") and without registration of the accounts under the Securities Act of 1933, as amended (the "1933 Act"). On behalf of UMB, we respectfully request a limited amendment of the UMB Letter. To expedite consideration of this request, we have not reiterated herein the information contained in the UMB Letter, but instead attach that letter as Exhibit A hereto and incorporate it herein by reference.1 (Weare not unmindful of the fact that in the past applicants have been required to restate Capitalized terms used and not defined herein are intended to have the meaning ascribed to them in the UMB Letter.

" ,

Jack W. Murphy, Esq.

Office of Chief Counsel

Washington, D.C.

in their entirety, no-action letters as to which amendments or clarifications were sought. We ask, however, that you reconsider that approach in this circumstance - a specific, unambiguous and limited amendment - in the interest of efficiency and economy for your staff and our client.) Request and Background The amendment requested hereby is simply that condition (7) of the UM Letter, appearing on Page 9 thereof, be deleted. That condition states:
Except with respect to the investment of cash

balances in client accounts in shares of a money market fund chosen by each client (as more fully described in your letter), the arrangement wil not involve recommendations concerning, or the

purchase and sale of, shares of investment

companies.
The reason for requesting this amendment is that one of the Advisers participating in the program which is the subject of the UMB Letter would like to make available shares of investment companies as investment opportunities for participants in that program. The description of UMB's services in connection with this program is set forth in Exhibit A. With respect to this amendment request, the following

information is offered to supplement and clarify such description:
As custodian, to reduce costs and facilitate expedited service, UMB would maintain an omnibus account at each investment company whose shares would be purchased by clients of the program, but would separately maintain records indicating the beneficial ownership of each client. UMB would take the following steps to ensure that clients retained all indicia of ownership of their investment company shares:
1) Clients would receive transaction by transaction confirmations of

each transaction, monthly statements of account and quarterly performance reports, all as described in Exhibit A;

Jack W. Murphy, Esq.
Office of Chief Counsel
Washington, D. C.

2 UMB would ensure that clients receive the periodic reports to shareholders for each investment company in which the client has an interest;
3) UMB would ensure that clients receive proxy statements in a
timely fashion. Neither UMB nor any Adviser would vote client proxies that are not returned to the respective fund by clients;
4) As indicated in Exhibit A, clients could terminate their Account

at any time and upon termination, the client could request and obtain liquidation of his or her portfolio or delivery of securities. We believe that under the facts and circumstances presented, and in light of the prior positions taken by the staff, amendment of the UMB Letter to delete the condition referred to above is not materially inconsistent with the policies expressed and implicit in that letter. We therefore respectfully request that you consent to such an amendment and confirm that this change in the program would not change the "no-action" position stated in the UMB Letter. DISCUSSION The Balliet letter is the seminal no-action letter with respect to the offering of mutual fund shares in a discretionary asset management service. In that letter, the staff of the Divisions declined to take a no-action position with respect to the use by an advisory firm of nominee accounts with various mutual funds as discretionary vehicles for the firm's clients where the advisory firm, acting as custodian, also would hold client securities in nominee name. The Balliet letter has spawned a long line of no-action letters in which the applicants successfully distinguished the Balliet letter on one of two bases:
2 Balliet, Blackstock & Stearns, Incorporated (publicly available August 19,

1987).

Jack W. Murphy, Esq.
Office of Chief Counsel
Washington, D. C.

1) The investment adviser had discretionary authority; however,
mutual fund shares would not be held in nominee name;3

2) Mutual fund shares were to be held in nominee name; however,

the investment adviser would not have discretionary authority.4 It is our view that. the offering of investment company shares by the Advisers in the UM program, who have discretionary authority over the Accounts, is not inconsistent with Balliet and the other letters cited, and does not raise the "fund of funds" concerns that prompted the enactment of the 1970 amendments to Section 12(d)(1) of the 1940 Act so long as the shares are held in nominee name by UMB, an independent third-party custodian, and UMB has no discretion over assets in the Account. Unlike the Balliet letter, in which the same party that exercised

discretion (the adviser) also maintained nominee accounts at various mutual fund complexes, in the UMB situation these functions will be divided between two independent parties. Under no circumstances wil participating Advisers hold customers' funds or securities and under no circumstances will UMB have any discretionary authority over any assets in the Account. UMB will hold shares in nominee name solely for administrative purposes. Except for its agreement with the Advisers to provide recordkeeping and custodial services for the Accounts, UMB is not otherwise affiliated with any Adviser. Perhaps more importantly, the UMB arrangement does not raise any of the concerns that prompted the enactment of the 1970 amendments to Section 12(d)(1) of the 1940 Act. In summary, those concerns were:
3 See,~, Rushmore Investment Advisors, Limited (publicly available February 1, 1991); Manning & Napier Advisors, Incorporated (publicly available April 24, 1990); Strategic Advisers, Incorporated (publicly

available December 13, 1988); Scudder Fund Management Service (publicly available August 17, 1988).

4See, ~, Atlantic Bank of New York (publicly available June 7, 1991).

Jack W. Murphy, Esq.

Office of Chief Counsel

Washington, D.C.

1) the acquisition of voting control of the investment adviser;

2) undue influence over portfolio management through the threat of

large scale redemptions and loss of advisory fees to the adviser and the disruption of orderly management of the investment company through the maintenance of large cash balances to meet potential redemptions;5

3) structural complexity which makes it difficult for the shareholder

to appraise the true value of his security; and
4) duplication of sales charges and advisory fees and administrative

costs.6
The proposed arrangement does not raise the first and second concerns because neither UM nor any Adviser will have the authority to vote fund shares and therefore wil not have the ability to influence portfolio management. "Structural complexity" is not a concern because shareholders will receive

appropriate disclosures and wil receive prospectuses, shareholder reports and

proxy materials of each fund. There will be no duplication of costs because the Advisers do not charge sales fees and the fees paid to the Advisers wil be for

5 See, Phoenix Series Fund (publicly available October 28, 1991). Arguably, any adviser that has discretion over a large number of accounts has the ability to effect large scale redemptions. The fact that shares are held in an omnibus account by a third party custodian does not increase this concern. 6 The 1970 amendments to the 1940 Act, among other things, responded to concerns about the mutual fund industry raised by the Commission in its 1966 report, Public Policy Implications of Investment Company Growth (reprinted in H.R.Rep. No.. 2337, 89th Cong., 2d Sess. 314-24 (1966)). House Comm. on Interstate & Foreign Commerce, Investment Company Amendments of 1970, H.R.Rep. No, 1382, 91st Cong., 2d Sess. 2-3 & 10-11.

Jack W. Murphy, Esq.

Office of Chief Counsel

Washington, D.C.

separate, value-added functions -- the selection and timing of mutual fund investments. Based on the foregoing, we respectfully request that the staff confirm it would not recommend any enforcement action to the Commission if UMB were to proceed under the UM Letter, amended as described herein to delete the restrictions on the purchase and sale of shares of investment companies. Please call the undersigned if you have any questions regarding this request. Very truly yours, ./~)~ ( J qhn F. Marvin ,.,'-~ JFM:blk Enclosure: as noted

cc: Office of Chief Counsel

Division of Corporation Finance

Washington, D.C.

i,IBLK,OAIL YjMURPHYL T.COW t