SEC no-action letter: Morgan Keegan & Co., Inc. exemption from Rule 10b-10(a) confirmation delivery

Home | Previous Page

April 21, 2005

Edward L. Brundick, III, Esq. Morgan Keegan & Company, Inc. Fifty Front Street Memphis, TN 38103

Re:

Request for Exemption from Rule 10b-10(a) for Preferred Advisors Discretionary Program

Dear Mr. Brundick:

Based on the facts and representations set forth in your letter of April 20, 2005, we find that it is appropriate in the public interest and consistent with the protection of investors to grant, and hereby grant, Morgan Keegan & Co., Inc. ("MK") an exemption, pursuant to Rule 10-10(f) under the Securities Exchange Act of 1934 ("Exchange Act"), from the trade-by-trade confirmation delivery requirements of Rule 10b-10(a) so that MK may send clients of its Preferred Advisors Discretionary Program ("Preferred Advisors Clients"), who have requested them, periodic statements not less often than quarterly, in lieu of trade-by-trade confirmations. 1 The periodic statements will contain all of the information required by Rule 10b-10 for transactions in securities effected by MK for Preferred Advisors Clients in their accounts during the applicable period.

In particular, we note the following:

MK will provide all Preferred Advisors Clients, prior to the opening of their accounts, and at least annually thereafter, a brochure describing the products, services, and fees of the Preferred Advisors Discretionary Program.

MK will develop a form of written or electronic consent for Preferred Advisors Clients who request not to receive trade-by-trade confirmations and, in lieu thereof, receive a periodic statement that contains the same information that would have been in the trade-by-trade confirmation for each transaction. New Preferred Advisors Clients will elect to receive a periodic statement in lieu of trade-by-trade confirmations by executing a separate signature line, specifically providing for such consent, contained in the client's account opening documentation.

Preferred Advisors Clients electing not to receive trade-by-trade confirmations could later change their minds and request, for no additional cost, trade-by-trade confirmations for any transaction since the date of the last periodic statement, as well as for all subsequent transactions. MK will also inform Preferred Advisors Clients that they could request, for no additional fee, trade-by-trade confirmations for previous transactions effected for up to a one-year period preceding the last periodic statement.

MK will send all information required by Rule 10b-10 to Preferred Advisors Clients in a periodic statement on at least a quarterly basis.

Preferred Advisors Clients will have access to MK's website and generally will be able to view within 20 minutes after a trade is effected in their account, but in no event later than the next business day after trade date (T+1), all information required by Rule 10b-10. Preferred Advisors Clients will also be able to obtain all information required by Rule 10b-10 either by telephoning their account representative or by requesting the trade-by-trade confirmation for the particular transaction.

MK will continue to generate and send trade-by-trade confirmations to those Preferred Advisors Clients who do not elect to receive periodic statements in lieu of trade-by-trade confirmations.

MK will also continue to generate and retain, in accordance with Exchange Act Rules 17a-3 and 17a-4, trade-by-trade confirmations for Preferred Advisors Clients who elect to receive periodic statements in lieu of trade-by-trade confirmations.

MK will not require or request that Preferred Advisors Clients elect not to receive trade-by-trade confirmations, but would make information available on how such clients could make such an election. MK client communications will inform existing and new Preferred Advisors Clients about their ability to receive confirmations on a trade-by-trade basis or in periodic statements, but would not suggest which choice is better. Such client communications also will inform Preferred Advisors Clients that, if interested, they should contact a MK representative to obtain more information or to obtain a copy of a written or electronic consent to request a periodic statement in lieu of trade-by-trade confirmations. These client communications will not suggest that such an election is required for Preferred Advisors Discretionary Program accounts or that the clients will incur additional costs if they did not elect to receive periodic statements in lieu of trade-by-trade confirmations.

MK will not act as principal in transactions with Preferred Advisors Clients.

Consistent with the wrap fee program concept of no transaction fees, no Preferred Advisors Clients will be charged a mark-up, mark-down, or commission for transactional services.

This exemption from Rule 10b-10 is based solely upon the representations you have made and is limited strictly to the facts and conditions described in your letter. In the event that a material change occurs with respect to any of the facts or representations presented, periodic statements should be discontinued and the use of trade-by-trade confirmations should be reinstated for the transactions described above pending presentation of the facts for our consideration. The staff of the Division of Market Regulation expresses no view with respect to other questions that the Preferred Advisors Discretionary Program may raise, including the applicability of any other federal or state laws or the applicability of self-regulatory organization rules concerning customer account statements or confirmations.

For the Commission, by the Division of Market Regulation Pursuant to delegated authority, 2

Brian A. Bussey Assistant Chief Counsel

Endnotes

1 MK is dually registered as a broker-dealer and an investment adviser. As explained in more detail in your letter, MK sponsors the Preferred Advisors Discretionary Account Program, an investment advisory program, wherein MK acts as the sole investment adviser and executing broker for any resulting securities transactions. A Preferred Advisors Client receives portfolio management, execution, asset allocation, and administrative services for one "wrap fee" based on assets under management. Because MK acts as both the investment adviser and the executing broker for its Preferred Advisors Discretionary Program, MK cannot rely on the class relief from the requirements of Rule 10b-10(a) granted to broker-dealer sponsors of wrap fee programs in Letter re: Money Management Institute, Securities Industry Association (Aug. 23, 1999). The conditions upon which that relief was granted make it clear that it is available only to broker-dealer sponsors that do not also serve as investment adviser for the wrap fee program.

2 17 CFR 200.30-3(a)(32).

Incoming Letter:

April 20, 2005

Ms. Catherine McGuire Chief Counsel Division of Market Regulation Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549

Re:

Request for exemption from confirmation delivery requirements of Rule 10b-10(a) for Preferred Advisors Discretionary Program

Dear Ms. McGuire:

Morgan Keegan & Co., Inc. ("MK") submits this letter and hereby requests an exemption, pursuant to Rule 10b-10(f) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), from the trade-by-trade confirmation delivery requirements of Rule 10b-10(a) for securities transactions in the accounts of the clients of its Preferred Advisors Discretionary Program ("Preferred Advisors Clients"). MK requests this relief to permit it to send requesting Preferred Advisors Clients, in lieu of trade-by-trade confirmations, a periodic statement not less often than quarterly that contains all of the information required by Rule 10b-10(a).

MK is a broker-dealer registered with the Securities and Exchange Commission ("Commission") under Section 15(b) of the Exchange Act and is a member of all principal national securities exchanges and the National Association of Securities Dealers, Inc. MK also is an investment adviser registered under the Investment Advisers Act of 1940, as amended. As a registered investment adviser, MK is a fiduciary for the clients of its Preferred Advisors Discretionary Program. MK is also the executing broker for any resulting securities transaction. MK, as a broker-dealer/investment adviser sponsor of an investment advisory program, believes that it is at a competitive disadvantage to other wrap fee sponsors because as a dual registrant it cannot use the Commission's waiver procedures for immediate confirmation requirements under the conditions set forth in Letter re: Money Management Institute, Securities Industry Association, (Aug. 23, 1999) ("MMI/SIA Letter").

The Preferred Advisors Discretionary Account

MK sponsors the Preferred Advisors Discretionary account (hereinafter "Preferred Advisors Account"), an investment advisory program, wherein MK acts as the sole investment adviser and executing broker for any resulting securities transaction. A Preferred Advisors Client, therefore, receives portfolio management, execution, asset allocation and administrative services for one "wrap fee" based on assets under management. MK's Investment Management Consulting Group Division manages Preferred Advisors Accounts.

All Preferred Advisors Clients open and maintain a securities brokerage account at MK and are subject to MK's account opening procedures, including execution of client agreements, new account forms, and other documentation. New Preferred Advisors brokerage accounts are subject to supervisory review and approval. All Preferred Advisors clients also execute a Preferred Advisors Discretionary Client Agreement ("Client Agreement") as well as an Investment Portfolio Questionnaire specifying investment objectives, advisory fees, and other required information. Preferred Advisor Clients also receive disclosures and brochures applicable to advisory clients and investment advisory programs. In a Preferred Advisors Discretionary Client Agreement, each client gives MK complete investment discretion to purchase or sell any security in a manner consistent with the client's investment objectives. MK discloses all fees charged for advisory and brokerage services, and each Preferred Advisors Client specifically agrees to these fees in the Client Agreement. The "wrap fee" includes charges for investment advisory services, brokerage commissions, custodian services, and the issuance of quarterly reports.

MK currently sends an immediate confirmation to each Preferred Advisors Client following the purchase or sale of any security in a Preferred Advisors Account. For each cash or securities transaction in a Preferred Advisors Account, MK's systems automatically generate an entry on the Preferred Advisors Client's monthly statement sent to the client at month-end detailing all securities transactions and fund movements during the period. On a quarterly basis, MK sends to each Preferred Advisors Client the Quarterly Performance Report, which provides a comprehensive review of securities positions including realized and unrealized gains and losses from a tax perspective.

Preferred Advisors Clients Requests to Waive Receipt of Immediate Confirmations

Because Preferred Advisors Clients retain MK as a fiduciary to manage their funds on a discretionary basis, some do not wish to receive immediate confirmation statements on a trade-by-trade basis. These clients are willing to expressly instruct MK, in writing, not to send immediate confirmation statements for trades in Preferred Advisors Accounts.

Previous SEC Action

Rule 10b-10 requires a broker-dealer to send immediate confirmation statements to its clients at or before completion of each transaction. With respect to accounts managed by a fiduciary, absent an exemption, brokers-dealers are required to send confirmation statements to the client or beneficial owner, in addition to any confirmations it may send to the fiduciary. 1

In 1994, the Commission allowed clients to waive receipt of an immediate confirmation where a fiduciary has discretion over the client's account. 2 In that case, the broker-dealer must (i) obtain an agreement from the client designating the fiduciary to receive immediate confirmations, and (ii) send a periodic report, at least quarterly, to the client containing all information required by such confirmation or send copies of the confirmations themselves on a periodic, at least quarterly, basis.

The relief requested by MK is similar to that granted previously by the Commission staff. The Commission staff, pursuant to delegated authority, 3 has permitted broker-dealers to send to clients a periodic statement in lieu of trade-by-trade confirmations where the broker-dealer was dually registered as an investment adviser or where the account was managed by an investment adviser affiliated with the broker-dealer. 4 Moreover, the staff has granted an exemption on behalf of certain broker-dealer sponsors of wrap fee programs, permitting such broker-dealers to confirm transactions in wrap fee programs through periodic statements in lieu of trade-by-trade confirmations. 5 In addition, the staff has granted an exemption from the trade-by-trade requirement of Rule 10b-10 where the person exercising investment discretion over a customer's account may be acting in the capacity of a registered broker-dealer, rather than a registered investment adviser. 6

MK's Proposal

As a result of client requests and in accordance with the Commission's existing guidance applicable to fiduciaries outlined in this letter, MK proposes to confirm Preferred Advisors Account transactions to clients through the use of quarterly statements, which will contain the information otherwise required by Rule 10b-10(a) in lieu of delivering separate, trade-by-trade confirmations for each such transaction. In implementing this proposal, MK would do the following:

MK would provide all Preferred Advisors Clients, prior to the opening of their accounts, and at least annually thereafter, a brochure describing the products, services, and fees of the Preferred Advisors Discretionary Program.

MK would develop a form of written or electronic consent for Preferred Advisors Clients who request not to receive trade-by-trade confirmations and, in lieu thereof, receive a periodic statement that contains the same information that would have been in the trade-by-trade confirmation for each transaction. New Preferred Advisors Clients would elect to receive a periodic statement in lieu of trade-by-trade confirmations by executing a separate signature line, specifically providing for such consent, contained in the client's account opening documentation.

Preferred Advisors Clients electing not to receive trade-by-trade confirmations could later change their minds and request, for no additional cost, trade-by-trade confirmations for any transaction since the date of the last periodic statement, as well as for all subsequent transactions. MK would also inform Preferred Advisors Clients that they could request, for no additional fee, trade-by-trade confirmations for previous transactions effected for up to a one-year period preceding the last periodic statement.

MK would send all information required by Rule 10b-10 to Preferred Advisors Clients in a periodic statement on at least a quarterly basis.

Preferred Advisors Clients would have access to MK's website and generally will be able to view within 20 minutes after a trade is effected in their account, but in no event later than the next business day after trade date (T+1), all information required by Rule 10b-10. Preferred Advisors Clients would also be able to obtain all information required by Rule 10b-10 either by telephoning their account representative or by requesting the trade-by-trade confirmation for the particular transaction.

MK would continue to generate and send trade-by-trade confirmations to those Preferred Advisors Clients who do not elect to receive periodic statements in lieu of trade-by-trade confirmations.

MK would also continue to generate and retain, in accordance with Exchange Act Rules 17a-3 and 17a-4, trade-by-trade confirmations for Preferred Advisors Clients who elect to receive periodic statements in lieu of trade-by-trade confirmations.

MK would not require or request that Preferred Advisors Clients elect not to receive trade-by-trade confirmations, but would make information available on how such clients could make such an election. MK client communications would inform existing and new Preferred Advisors Clients about their ability to receive confirmations on a trade-by-trade basis or in periodic statements, but would not suggest which choice is better. Such client communications also would inform Preferred Advisors Clients that, if interested, they should contact a MK representative to obtain more information or to obtain a copy of a written or electronic consent to request a periodic statement in lieu of trade-by-trade confirmations. These client communications would not suggest that such an election is required for Preferred Advisors Discretionary Program accounts or that the clients would incur additional costs if they did not elect to receive periodic statements in lieu of trade-by-trade confirmations.

MK would not act as principal in transactions with Preferred Advisors Clients.

Consistent with the wrap fee program concept of no transaction fees, no Preferred Advisors Clients would be charged a mark-up, mark-down, or commission for transactional services.

MK believes it is appropriate for the Commission to grant the requested relief to permit MK to confirm client transactions in quarterly statements according to written client authorization as described in this letter. Under the terms of the proposed exemption, the Preferred Advisors Clients will be provided the investor protections contemplated by Rule 10b-10, without obligating such clients to receive trade-by-trade confirmations they do not want and have asked not to receive. Moreover, MK believes that the relief requested is consistent with the procedures authorized for other investment advisory programs.

Should you have any further questions or require additional information, please feel free to contact me at 901/524.4195. Thank you for your attention to this matter.

Very truly yours,

Edward L. Brundick, III Morgan Keegan & Company, Inc. VP/Staff Attorney - Asset Management

cc:

Brian Bussey Assistant Chief Counsel

Norman Reed Special Counsel

Endnotes

See SEC Release No. 34-33743 (Mar. 9, 1994), 59 F.R. 12767 (Mar. 17, 1994).

See SEC Release No. 34-34962 (Nov. 10, 1994), 59 F.R. 59612, 59614 (Nov. 17, 1994).

See 17 C.F.R. � 200.30-3(a)(32).

See Letter re: Donaldson, Lufkin & Jenrette Securities Corporation (Aug. 21, 1997); Letter re: Scudder Investor Services, Inc. (Feb. 11, 1998); and Letter re: Advest, Inc. (July 19, 1999).

See MMI/SIA (Aug. 23, 1999).

See Letter re: Goldman, Sachs & Co. (Aug. 14, 2003).

http://www.sec.gov/divisions/marketreg/mr-noaction/mkci042005.htm

Home | Previous Page

Modified: 04/21/2005