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

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