Rule 3a-4 of the Investment Company Act of 1940 offers a safe harbor from the definition of investment company for programs that provide discretionary investment advisory services to clients. Programs that meet the following requirements do not have to register as investment companies:

  • Each client's account in the program is managed on the basis of the client's financial situation and investment objectives and in accordance with any reasonable restrictions imposed by the client on the management of the account.

  • Each client has the ability to impose reasonable restrictions on the management of the client's account, including the designation of particular securities or types of securities that should not be purchased for the account, or that should be sold if held in the account.

  • The sponsor or person designated by the sponsor provides each client with a statement, at least quarterly, containing a description of all activity in the client's account during the preceding period, including all transactions made on behalf of the account, all contributions and withdrawals made by the client, all fees and expenses charged to the account, and the value of the account at the beginning and end of the period.

  • The client must have the same rights over the securities in the account as if they held those securities in their own name, including the rights to:
    • Withdraw securities or cash
    • Vote (or choose a proxy vote) on securities in the account
    • Proceed directly as a security holder against the issuer
    • Be provided with timely confirmations of each securities transaction

  • The accounts are managed based on the clients' needs, including:

  • When the account is opened, the sponsor obtains client information, which includes financial situation and investment objectives.

  • At least annually, the client is contacted to determine whether there have been any changes in the client's financial situation or investment objectives, and whether the client wishes to impose any reasonable restrictions on the management of the account or reasonably modify existing restrictions.

  • At least quarterly, the client is contacted and reminded to notify the sponsor if there have been any changes in financial situation, or if the client wishes to impose any reasonable restrictions, or modify any such restriction on the account.

  • The sponsor and personnel of the manager of the client's account, who are knowledgeable about the account and its management, must be reasonably available to the client for consultation.


Structure, Management and Operation of Mutual Funds

Related Articles
  1. Managing Wealth

    Asset Manager Ethics: Acting In the Benefit of Clients

    Investment managers should always act to benefit the client. Learn what actions managers should take on a client's behalf.
  2. Financial Advisor

    How to Construct an Annual Review for Clients

    One of the best things that advisors can provide to clients is an annual review of their financial situation. Here are some guidelines.
  3. Financial Advisor

    Private Banking Vs. Wealth Management: Not Quite the Same

    Discover the various ways in which private banking and wealth management services coincide, as well as the significant differences between them.
  4. Financial Advisor

    Advisors Need to Talk Less, Ask and Listen More

    Financial advisors spend a lot of time giving their clients advice on how to invest their money. But what they often forget to do is listen.
  5. Professionals

    When (And How) To Fire A Client

    Firing the clients who take more of your time and effort than the revenue they contribute is a great way to improve your bottom line.
  6. Financial Advisor

    Tips for Assessing a Client's Risk Tolerance

    Determining a client’s risk tolerance is a critical piece of the puzzle in designing and appropriate asset allocation.
  7. Financial Advisor

    Deal Effectively With Difficult Clients

    Learn how to tame the most shrewish clients with these simple methods.
  8. Financial Advisor

    Top Tips for Inheriting a Book of Clients

    Inheriting another advisor's book of clients can be a big boon. Here are some tips on how to handle the transition.
  9. Financial Advisor

    How Client Behavior Impacts Retirement Planning

    While many clients know they should save for retirement, they don't. Here's how advisors can help modify their bad financial behavior.
  10. Financial Advisor

    How to Avoid Scuttling Your Client’s Retirement

    Bad habits can ruin a retirement portfolio (and your credibility as an advisor). Here are some practices to avoid.
Trading Center