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RESPONSE OF TH OFFICE OF CilEF COUNSEL

DMSION OF INSTMNT MAAGEMENT

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September 2, 1999

Ref. No. 98-684-0CC

BISYS Fund Services, Inc.

Your letter dated September 1, 1999 requests our assurance that we would not

recommend enforcement action to the Commission under Section 206 of the Investment Advisers

Act of 1940 ("Advisers Act") if the sponsor of a mutual fund wrap fee program defers, and

eventually excuses, the payment of certin expenses by the client so long as the client continues

its paricipation in the program for a specified period of time.

Facts

BISYS Fund Services, Inc. and its affliates (collectively, "BISYS") provide

administration, fund accounting, transfer agency, and distribution services to registered open-end

funds"). According to your letter, BISYS has

management investment companies ("mutual

developed a proprietary mutual fund wrap fee program ("Program") that it believes its investment

1 BISYS wil assist each

manager customers ("Sponsors") can market successfully to investors.

Sponsor in customizing and developing the Program, and wil provide consulting and training

services to the Sponsor. The Sponsors wil be investment advisers registered under the Advisers

Act, or entities that are not registered because they are not within the Advisers Act's definition of

an investment adviser, such as banks.

Using asset allocation models, the Sponsor will develop an allocation strategy for each

investor ("client") and wil recommend a variety of mutual funds ("Eligible Funds") among

which the client's assets wil be allocated. The Eligible Funds may be advised by a Sponsor or its

affliates. The Sponsors wil charge clients participating in the Program an annual fee ("Program

Fee"), calculated as a percentage of

each client's assets invested through the Program, to cover

investment advisory services, custody, and the administrative expenses of operating the Program.

In addition, each Eligible Fund into which a client's assets are invested wil charge the fees

described in its prospectus) Clients also may pay a separate service fee, as described below.

i You state that the Program wil be organized and operated in accordance with Rule

3a-4 under the Investment Company Act of 1940 ("1940 Act"). Rule 3a-4 provides a nonexclusive safe harbor from the definition of an investment company for programs that provide

discretionary advisory services to clients. You have not asked, and we take no position

concerning, whether the Program, as described in your letter, fits within the Rule 3a-4 'safe

harbor.

2 According to your letter, investments in the Eligible Funds wil not be subject to any

front-end or deferred sales charges that otherwise may be charged by the Eligible Funds.

Investments in the Eligible Funds may, however, be subject to fees charged pursuant to a

distribution plan under Rule 12b-1 under the i 940 Act ("Rule 12b-1 fees"), and brokers (as

described below) may receive these fees.

Each Sponsor wil market the Program to clients through registered broker-dealers

the Sponsor. You assert that, as a condition to its

("Brokers"), which may be affliates of

paricipation in the Program, each Broker wil enter into an agreement with each client that wil,

among other things, authorize the Broker to purchase shares of the Eligible Funds on the client's

behalf. The Broker wil provide a variety of services in connection with the Program, including

determining the potential client's eligibility for the Program, discussing the recommended asset

allocation with the client, opening the client's account, receiving the client's initial and

subsequent investments, and aranging for the purchase of the Eligible Funds recommended by

the Sponsor. The Broker also wil provide ongoing services to each client, including answering

client inquiries, periodically reviewing the account's performance, anual tax reporting, and

the current asset allocation strategy)

In order to compensate the Broker for services rendered to clients, the Sponsors wil pay the

the client's investment through the

Broker a fee ("Broker's Fee") equal to a percentage of

meeting anually with the client to reassess the propriety of

the Advisers Act defines "investment adviser" to mean "any person

who, for compensation, engages in the business of advising others, either directly or though

publications or wrtings, as to the value of securities or as to the advisabilty of investing in,

purchasing, or sellng securities...." Par (c) ofthat subsection provides an exception from that

definition for broker-dealers whose advisory duties are "solely incidental" to their brokerage

business, and who receive no "special compensation" for investment advice. We believe that, at

a minimum, the advice rendered to Program clients by the Brokers would not be "solely

incidental" to their brokerage business. See Investment Company Act Release No. 21260, n.7

(July 27, 1995) (release proposing Rule 3a-4 under the 1940 Act). Brokers therefore would meet

the definition of an investment adviser and would not be able to rely on the broker-dealer

exception from that definition.

3 Section 202(a)(11) of

A Broker participating in the Program therefore would be required to meet some other

exception from the definition of an investment adviser or comply with all applicable regulations

and disclosure requirements under the Advisers Act, including providing a brochure to clients

the

consistent with Rule 204-3. In addition, a Broker would be required under Section 206 of

Advisers Act to evaluate whether the fees that it charges, in light of the services that it provides

under the Program, are higher than those charged by other advisers for the same or similar

services, and, if

so, disclose that fact. See Shareholder Services Corp. (pub. avaiL. Feb. 3, 1989).

Finally, you have not asked, and we take no position concerning, whether a Broker would be

the Broker's receipt of

the

acting as a broker for a person other than a client -- on account of

Broker's fee, Rule 12b-1 payments ~ supra note 2), or other compensation -- for purposes of

adviser

the Advisers Act. Section 206(3) prohibits, among other things, any

Section 206(3) of

from effecting any sale or purchase of any security for the account of a client while acting as a

broker for another person, without, among other things, obtaining the client's prior consent.

Market Regulation has asked us to inform you that the Broker's

receipt of fees from a Sponsor, or from any person other than its customer, may indicate that the

Finally, the Division of

Broker is acting as agent in the transaction for the third-part provider of its fees as well as agent

for the customer. Brokers participating in this Program are therefore reminded of

their

obligations under Rule 1 Ob-1 0 under the Securities Exchange Act of 1934, to provide each

customer with written, transaction-specific disclosure of the Broker's capacity in each transaction

that it effects on behalf of a customer, as well as whether the Broker, acting as agent, receives

remuneration from any third part in connection with the transaction.

2

3% ofthe client's initial and

Program. BISYS currently expects the Broker's Fee to equal

subsequent investments through the Program.

According to your letter, clients may pay a separate fee to a Sponsor to help recoup

two payment options.4

First, the client may, at the initiation ofthe advisory relationship and upon each subsequent

investment, pay the Sponsor a fee ("Front-end Fee") equal to the amount paid by the Sponsor as

the Broker's Fee. Alternatively, clients may defer paying the Front-end Fee by selecting a

contingent payment option ("Contingent Fee"), which would be assessed only ifthe client

that investment.5 Each Sponsor

terminates paricipation in the Program within the first 3 years of

which payment option the client chooses. The Sponsor

'wil pay the Broker's Fee regardless of

wil use any amounts collected through the Front-end or Contingent Fee option to help recoup

amounts paid to the Brokers for services that they have provided to clients in connection with the

the client chooses the Contingent Fee option, the Sponsor wil use other assets,

Program. If

including borrowing from unaffliated entities, to finance the Broker's Fee.

expenses paid out as Broker's Fees. Clients may do this through one of

Analysis'

the Advisers Act makes it unlawfl for an investment adviser "to

engage in any transaction, practice, or course of business which operates as a fraud or deceit

upon any client or prospective client." As a fiduciary, the adviser has an obligation to abide by

Section 206(2) of

the highest stadards of conduct and must act in the best interests of the client. Because certain

fee arangements may have the effect of penalizing a client for ending the advisory relationship,

has taken the

or may make the client reluctant to terminate an unsatisfactory adviser, the staff

position that an adviser's imposition of certain fees upon the termination of an advisory

relationship may be inconsistent with the adviser's fiduciary duty, and may violate Section 206 of

the Advisers Act.6

You believe that the Contingent Fee does not raise similar concerns. You argue that the

Contingent Fee simply reimburses the Sponsors for expenses incurred in financing payments to

the Brokers and thus is not a penalty. In effect, you argue that deferring the imposition of certin

expenses until the client terminates the advisory relationship is not inconsistent with the adviser's

fiduciar obligation to the client so long as those fees are fully disclosed and agreed to in

4 You maintain that the aggregate of all fees charged in connection with the Program wil

"sales charges" as defined in Rule 2830 ofthe Rules of

not exceed limits on the payment of

Securities Dealers.

the National Association of

Conduct of

the

client terminates in the first year of the investment, 2% in the second 'year, 1 % in the third year,

and 0% after the third year. According to your letter, the Contingent Fee wil be computed on a

first-in, first-out basis. You also represent that the Contingent Fee wil never exceed the amount

that the client would have paid as the Front-end Fee.

5 The Contingent Fee wil equal

3% ofthe client's assets invested in the Program if

6 See National Deferred Compensation (pub. avaiL. Aug. 31, 1987) ("(a)n adviser may not

fulfill its fiduciar obligations if it imposes a fee strcture penalizing a client for deciding to

terminate the adviser's service or if it imposes an additional fee on a client for choosing to

change his investment") (footnote omitted).

3

,",

advance, and do no more than compensate the Sponsor for services already provided by the

Broker to the client.

We agree that a fee paid to an investment adviser by a client for services previously

rendered to the client would not violate Section 206 solely because the fee was payable upon

termination of the advisory relationship, if at all. The staff has taen the position that certin

fees, directly attibutable to services provided by the adviser, may be assessed upon the

termination of the advisory relationship.?

Investment advisers have a duty to disclose all material information to clients in order to

highlight potential or actual conflcts of interest between them.8 Because a contingent deferred

fee may have the effect of discouraging a client from terminating the advisory relationship, that

fee is highly material to the client's decision-making process and must be disclosed under Section

206 of

the Advisers Act. Indeed, based on the relevance ofthis information to a client's decision

the adviser, we believe that the disclosure must be designed

to enter into or retain the services of

to ensure that the client's attention is directed to this information.9

You believe that each Sponsor's disclosure procedures wil satisfy

the disclosure

requirements under Section 206. According to your letter, the Brokers wil provide clients with a

separate disclosure document not less than 48 hours beforè the client enters into the investment

advisory agreement, or at the time of entering into the agreement if the client has the right to

terminate the agreement within five business days without incurring any fees. Each Sponsor wil

receive the executed acknowledgment of receipt of the separate disclosure document no later than

(1) the time that the client enters into the investment advisory agreement, or (2) the time when the

client may terminate the agreement without penalty if the disclosure document is not transmitted

to the client within 48 hours of the time that the agreement is entered into.1O You state that the

disclosure document wil, among other things, describe the services for which the Contingent Fee

is paid, how it is calculated, that subsequent investments in the Program trigger the 3-year period

for each investment, and that the Contingent Fee may act as a disincentive to terminating

paricipation in the Program. You furter represent that the separate disclosure document wil

provide that, if a client terminates his or her paricipation in the Program because of a change in a

7 See Stephenson and Co. (pub. avaiL. Dec. 29, 1980) (adviser that charged certin

"wrapping-up" fees to clients who terminated their advisory contracts early would not necessarily

violate Section 206 of

the Advisers Act under certain circumstaces); RDP Investments Ltd.

(pub. avaiL. May 24, 1975) (certin "star-up" expenses could appropriately be deducted from the

refund of pre-paid advisory services in connection with the early termination of the advisory

the Advisers Act).

contract without necessarily violating Section 206 of

8 SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191-92 (1963).

9 See,~, Investment Advisers Act Release No. 688 (July 12, 1979) (adopting release for

Rule 206(4)-3 under the Advisers Act) (a solicitor's disclosure information must be contained in

a separate document to ensure that the client's attention wil be directed to it).

10 You state that the Sponsors wil retain the written acknowledgments obtained from

clients in an easily accessible place for a period of not less than five years, the first two years in

an appropriate office of that Sponsor. See Rule 204-2( e)( I) under the Advisers Act.

4

the Program or the Eligible Funds, or the

the Program or the Eligible Funds, the client may stil be subject to the

Contingent Fee.1 1 We agree that the disclosure obligations under Section 206 regarding the

Contingent Fee would be satisfied by the procedures that you propose.

Sponsor's or Broker's personnel, the performance of

investment strategy of

Our positions are based on the facts and circumstances set fort in your letter. Any

different facts or circumstaces may require different conclusions.

E~:142

Senior Counsel

11 You maintain that the disclosures relating to the Contingent Fee are in addition to other

disclosures to be made in connection with the Program itself. For example, you state that the

Sponsors wil, at a minimum, disclose that clients can avoid paying the Program Fee as well as

the Front-end Fee or Contingent Fee by purchasing the Eligible Funds directly. See Shareholder

Services Corp. (pub. avaiL. Feb. 3, 1989). .

5

STltOOCK & STltOOCK & LAVAN LLP

180 MAIDEN LANE

NEW YORK, NY 10038-4982

PHONE 212-806-540

FAX 212-806-6006

Advisers Act; Section 206

September 1, 1999

Office of Chief Counsel

Division of Investment Management

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Re: BISYS Mutual Fund Asset Allocation Program

Ladies and Gentlemen:

We are writing on behalf ofBISYS Fund Services, Inc. and its affliates (collectively, "BISYS")!

to request that the Staf advise BISYS that it would not recommend any enforcement action to

the Securities and Exchange Commission based on Section 206 of the Investment Advisers Act

of 1940, as amended (the "Advisers Act"), if a mutual fud asset allocation program is marketed

as described below.

Facts

BISYS provides administration, fud accounting, transfer agency and distribution services to the

mutual fud industry. In that capacity, BISYS provides these services to approximately 900

mutual fud portfolios ("mutual fuds") representing approximately $200 bilion in assets.

BISYS has developed an innovative way to finance payments made to brokers involved in the

sale of a mutual fud asset allocation program (the "Program") that would be offered exclusively

through BISYS's customers. The Program would be organized and operated in accordance with

the provisions of Rule 3a-4 under the Investment Company Act of 1940, as amended (the" 1940

Act"). A registered investment adviser or entity not within the definition of investm,ent adviser

under the Advisers Act, such as a ban, would serve as the Program sponsor (the "Sponsor").

The BISYS Group, Inc., through its subsidiar BISYS Fund Services, Inc., maintains 16

limited purose broker-dealers which each serve as a principal underwiter for one or

more registered investment company clients of BISYS.

5621 !8v8

100 FEDER STREE

RAKÓ ÚT 1-3

1150 SEV STR. N.W

H-1088 BUDAPEST. HUNGAR.Y

2029 CENR.Y PAR EAS

Los ANGELl' CA 90067

200 SoUT BISCYNE BLVD.

BoSTON, MA 02110

MiAM FL 33131

WASHINGTON. D.C. 20036

PHONE 617-482-6800

PHONE 361-266-9520

PHONE 310-556-5800

PHONE 305-358-9900

PHONE 202-452-9250

FAX 617-330-511

FAX 361-266-9279

FAX 310-556-5959

FAX 305-789-9302

FAX 202-293-2293

STROOCK & STROOCK & LAVAN LLP

Offce of Chief Counsel

September 1, 1999

Page 2

Using asset allocation models, the Sponsor would develop an allocation strategy for a paricular

client and would recommend a variety of mutual fuds ("Eligible Funds") among which the

client's assets should be allocated based on that strategy. Many ofthe Eligible Funds would be

advised by affliates of

the Sponsor.2

the Program and will provide consulting and

training to the Sponsor. For those Eligible Funds managed by the Sponsor or an affliate, BISYS

tyically would serve as the fud's distributor and also might serve as administrator, transfer

agent and/or fund accounting agent. For other Eligible Funds, BISYS would produce and mail

client statements generally on a quarerly basis and provide other administrative services. Each

client paricipating in the Program would be charged an anual fee, calculated as a percentage of

the client's assets subject to the Program, to cover all investment advisory services, custody and

administrative expenses of operating the Program. Each of the underlying mutual fuds also

would charge its customar fees as described in its prospectus.3

BISYS wil assist in the design and development of

The Program would be marketed though registered broker-dealers (each, a "Broker"), which

the Sponsor. As a condition to its paricipation in the Program, each Broker

could be affliates of

wil enter into an agreement with each of its clients, which would, among other things, authorize

the Broker to purchase shares of the Eligible Funds on the client's behalf.

2

It is anticipated that the Sponsor or an affliate will manage 50% to 70% of the Eligible

Funds, although we do not believe that the determination to grant the requested relief

should change if the actual percentage is higher or lower than anticipated.

3

BISYS understands that these fees would include Rule 12b-1 fees, to the extent the

Eligible Fund has adopted a Rule 12b-l Plan, and that Brokers could receive 12b-1

payments from the Eligible Funds. These 12b-1 payments would be made for the

distribution and servicing assistace at the Fund level, as

customar puroses of

contrasted with payments made to Brokers under the Program which will be made to

assist with servicing clients at the Program leveL. BISYS understads that these services

would not be duplicative. While the Brokers may have sellng dealer agreements with the

distributor of the Eligible Funds, neither the Brokers nor the Sponsor wil act as a

principal underwter or dealer with respect to the Eligible Funds. Clients paricipating in

the Program will not be subject to any front-end sales charge imposed on the purchase of

the Eligible Funds' shares. The exemption from any applicable sales load would be

accomplished by a scheduled variation from the relevant Fund's sales load schedule

pursuant to Rule 22d-1 under the 1940 Act. The class of Eligible Fund shares sold to

Program paricipants would not be subject to a deferred sales charge.

562 II 8v8

STROOCK & STROOCK & LAVAN LLP

Offce of Chief Counsel

September 1, 1999

Page 3

The Brokers will provide a variety of services in connection with the Program. Generally, the

Brokers will perform the full range of services provided by brokers in tyical mutual fud asset

allocation programs.4 Among other thigs, they wil:

. determne whether a potential client is eligible for the Program and

recommend another investment alternative to those who are not eligible;

. speak with clients in detail about, and answer their questions about, the

Program, with the goal of explaining how the Program can help clients

achieve their paricular investment needs;

. help the client fill out the client questionnaire for the Program; .

. discuss the recommended asset allocation strategy with the client;

. open an account for a client who decides to paricipate in the Program and, in

connection therewith, receive the client's initial investment in -the Program and

any subsequent investments in the Program and transmit them to the Sponsor;

. arange for the purchase of the Eligible Funds recommended by the Program

for the client's account;

. calculate the value of a client's account following dividend reinvestments in

the Eligible Funds;

. provide clients with anual tax reporting; and

. provide important ongoing services to each client, including answering client

inquines regarding the Progra:, reviewiag periodically with the client the

performance of the client's portfolio of Eligible Funds and meeting at lem¡t

4

56211SvS

The Brokers wil be acting solely as agents for their clients. In LinscolPrivate Ledger

Corp. (pub. avaiL. November 1, 1994), the Staff stated that "Section 22( d)'s restrictions

do not apply to a broker, as that term is defined in the 1940 Act." The Staff concluded

that, because the broker-dealer was acting as agent for its customers in purchasing and

redeeming investment company shares, Section 22(d) did not apply.

STROOCK & STROOCK & LAVAN LLP

,"'I

Office of Chief Counsel

September 1, 1999

Page 4

anually with the client to determne whether the recommended asset

allocation strategy should be changed based on changes in the client's financial

profile.

For these services rendered, the Sponsor would pay the Broker a fee (the "Broker's Fee,,)5,

curently expected to be 3%, based on

the assets invested in the Program by the Broker's client.

Clients would be charged a front-end fee (the "Front-End Fee"), curently expected to be 3%,

which would be assessed on new assets each time assets were invested in the Program. Clients

would be able to avoid paying the Front-End Fee by selecting a contingent payment option, under

which a fee, similar to a contingent deferred sales charge (the "Contingent Fee"), would be

assessed if the client terminates his or her paricipation in the Program within the first three years

ofinvestment.6 In no circumstace would the Contingent Fee result in a client paying a greater

amount than the Front End Fee.

the Front-End Fee collected by the Sponsor on newly invested assets would be paid to the

Broker as the Broker's Fee. If a client chooses the Contingent Fee option, the Sponsor would

finance its obligation to pay the Broker's Fee by borrowing from an unafliated third par (the

"Lender"). The Sponsor would repay the Lender from the wrap fees it collects under the

Program, as well as from any of its other revenue sources, including, if applicable, the

Contingent Fee.

All of

5

The Broker's registered representative who sold the Program to the client tyically would

the Broker's Fee.

receive a portion of

6

The Contingent Fee would be applied to the lesser of the amount invested in the Program

by the client (without giving effect to any appreciation in the value of

the investment) and

the value of the client's account at the time the client terminates his or her paricipation in

the Program. The Contingent Fee would. be assessed on a sliding scale, computed under a

first-in, first-out method, which assumes, as an example, that a withdrawal is made first

of amounts representing shares of the Eligible Funds held for at least thee years, then

amounts representing shares of the Eligible Funds held for at least two years but less than

three years, then amounts representing shares of the Eligible Funds held for at least one

the Eligible

year but less than two years, and finally, amounts representing shares of

Funds held for less than one year. The Contingent Fee is expected to equal 3% of

the

amount subject to charge if the Program is terminated within the first year of investment,

2% after the first year but before the second year, 1 % after the second year but before the

third year, and 0% after the third year. Different periods could be used, but only if

consistent with the principles set forth herein.

56211SvS

STROOCK & STROOCK & LAVAN LLP

.'

Office of Chief Counsel

September 1, 1999

Page 5

The Contingent Fee option is a material aspect of the Program and, to satisfy the disclosure

requirements of Section 206 of the Advisers Act, the Sponsor believes that each client should be

expressly informed about it. We believe the disclosure procedures described below will satisfy

the disclosure requirements of Section 206 of the Advisers Act. As par of these procedures, the

Sponsor will provide a separate document (the "Contingent Fee Sumar") to each Broker who

will agree to provide it to each of

its clients. The Contingent Fee Sumar will describe the

Contingent Fee, its purose and how it is calculated and also will describe the services for which

the Contingent Fee is paid. The Contingent Fee Sumar will provide that initial and

subsequent investments in the Program may be subject to the Contingent Fee depending on when

the client terminates his or her paricipation in the Program, and that the Contingent Fee may act

as a disincentive to terminate the client's paricipation in the Program. The Contingent Fee

Sumar also will provide that if the client terminates his or her paricipation in the Program

because of a change in the personnel ofthe Sponsor or Broker, or a change in the investment

strategy or performance of the Program or one or more Eligible Funds, the client stil may be

subject to the Contingent Fee depending on when the client terminates his or her paricipation in

the Program. The Contingent Fee Sumar will be delivered to the client at least 48 hours

before the client enters into the Program or at the time the client enters into the Program if the

client has the right to terminate his or her paricipation in the Program without penalty within

five business days after entering into the Program.7 The Sponsor will receive from the client a

the Contingent Fee Sumar. Ths

his or her receipt of

wrtten acknowledgment of

acknowledgment must be received by the Sponsor at the time the client enters into the Program

the client has the right to terminate his or her paricipation in the Program without penalty

or, if

within five business days after entering into the Program, no later than such fift business day.

The Sponsor will keep all wrtten acknowledgments received from clients who paricipate in the

Program in an easily accessible place for a period of not less than five years, the first two years in

an appropriate offce ofthe Sponsor.s

For the reasons discussed below, we believe that the imposition of

Section 206 of

raise an issue under the anti-fraud provisions of

the Contingent Fee does not

the Advisers Act.

Discussion

the Advisers Act makes it unawfl for an

investment adviser "to engage in any transaction, practice or cause of business which operates as

a fraud or deceit upon any client or prospective client." In other contexts, the Staff has taken the

Section 206 of

the Advisers Act. Section 206(2) of

position that an adviser's imposition on a client of a penalty for terminating the advisory

7

See Rule 204-3(b)(1) of

the Advisers Act.

See Rule 204-2(e)(1) of

the Advisers Act.

S

56211SvS

"\ :'

STROOCK & STROOCK & LAVAN liP

Offce of Chief Counsel

September 1, 1999

Page 6

relationship is inconsistent with the adviser's fiduciar obligations to deal fairly with and in the

best interests of its clients and, therefore, may violate the anti-fraud provisions of Section 206 of

the Advisers Act.

In National Regulatory Services, Inc. (pub. avaiL. December 2, 1992), prepaid wrap fees were

forfeited by the client upon termination of the wrap fee arangement. The Staff wrote, "In light

of the personal natue of the advisory contract, a client should not be put in a position where it is

impossible to end the relationship without suffering a financial loss. Therefore, wrap fee clients

must be able to terminate the wrap fee arangement at any time without penalty (i.e., sponsors

must refud prepaid wrap fees upon termination)." See also Robert D. Brown Investment

Counsel, Inc. (pub. avaiL. July 19, 1984) ("Where the basis for (adviser/client) relationship is

ended, and the adviser, accordingly, is unable to continue to pedorm services under the contract,

in our view the adviser's fiduciar duties precludes its receipt of compensation for services it is

not able to perform. ")

Ln National Deferred Compensation, Inc. (pub. avaiL. August 31, 1989), an adviser assessed and

retained a sliding scale "surender fee" to a client's investment advisory account where the

account was terminated by client within the first five years of investment. The Staff wrote that

the imposition by the adviser of the surender fee may violate Section 206 of the Advisers Act.

stated that an

Citing SEC v. Capital Gains Research Burau, 375 U.S. 180 (1963), the Staff

investment adviser is a fiduciar and must act in the best interest of the client. An adviser may

not fulfill its fiduciar obligations if it imposes a fee structure that penalizes a client for deciding

to terminate the adviser's service.

We believe the relevant facts here are distinguishable from those in the no-action letters

discussed above and that the Contingent Fee does not raise the concerns described therein. First,

the imposition ofthe Contingent Fee does

not subject the client to a financial loss. The

Contingent Fee is not a "penalty" imposed on the client for terminating the Program, as it was in

National Deferred Compensation, Inc. The Contingent Fee is being paid for services rendered by

the Brokers to their clients. In addition, the Contingent Fee is a beneficial economic alternative

to the Front-End Fee option, since, because it declines over time, the Contingent Fee may be less

costly than the Front-End Fee option.9 Second, the Contingent Fee,.while it may be retained by

the Sponsor, is not "compensation" for services that will not be performed, as it was in Robert

'incured to

Brown. The Contingent Fee is structured to reimburse the Sponsor for its expenses

finance payments to the Brokers. The Contingent Fee is merely a distrbution-tye fee that will

be charged to the client in order to defray the Sponsor's cost of financing the Broker's Fee. The

9

56211SvS

As stated above, in no circumstance would the Contingent Fee option result in the client

paying a greater amount than the alternative Front-End Fee option.

.,

') it

STR.oOCK & STROOCK & LAVAN LLP

Office of Chief Counsel

September 1, 1999 .

Page 7

fees to be assessed under the Program are similar to the front-end and back-end sales loads

charged by many mutu fuds. Clearly, these distribution-related charges are permjtted when

imposed directly by a mutual fud. Imposing them at the Sponsor level should not make them

the Contingent Fee will be fully disclosed to

impermissib1e.1O Finally, the Front-End Fee and

clients in the documentation describing the Program. , Ths disclosure, among other things, wil

can avoid paying the Contingent Fee simply by choosing the Front-End

make it clear that clients

underlying fuds

Fee option and may avoid all fees, including the Program fee, by purchasing the

i i Under the circumstances where, as here, these fees are fully disclosed to clients and

directly.

the alternatives are disclosed clearly, we do not believe the anti-fraud provisions of Section 206

should apply.

Based upon the foregoing, we respectfuly request confrmation that the Staf will not

the Program

recommend any enforcement action against BISYS, the Sponsors or their affiiates if

is implemented and marketed as described herein.

Please feel free to telephone Richard Horowitz at (212) 806-5513 or Stuar H. Coleman at (212)

806-6049 with any questions or comments you may have.

Vi(

LLP

10

II

The fees would not exceed the NASD limits on the payment of "sales charges," as defined

in Rule 2830 of the NASD Conduct RuléS.

In Shareholder Services Corp. (pub. avaiL. Febru 3, 1989) (an advisory service "

allocated client fuds among a variety of no-load mutual fuds and clients were charged

an anual management fee payable to the adviser and a cash referral fee payable to a

solicitor), the Staff stated that, assuming an adviser's fees are reasonable, "at a minimum

the adviser must disclose to clients that (1) in addition to the advisory fee charged by the

investment adviser (and the solicitation fee it pays), each investment company in which a

client's fuds may be invested also pays its own investment advisory fees and other

expenses and (2) if the client deals directly with the no-load fund, he or she would neither

pay a transaction fee nor an advisory fee."

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