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Release No. Rel 93-3-BD REL 93-3-BD - Michigan
| Release No. Rel 93-3-BD Form. This is a Michigan form and can be used in General Securities Blue Sky Secretary Of State . |
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MICHIGAN CORPORATION & SECURITIES BUREAU RELEASE NO. 93-3-BD TO: ALL INTERESTED PARTIES SUBJECT: Investment Adviser Custody or Access to Customer Funds and Securities General Background: Earlier this year the Bureau issued Release 93-2-BD on the subject of In vestment Adviser Custody or Access to Customer Funds and Securities. That releas e indicated that "The Corporation and Securities Bureau (the Bureau) has broadly i nterpreted this provision [Section 102(e) of the Michigan Uniform Securities Act] to p rohibit not only direct, but also constructive custody of customer funds and securities, including direct billing of advisory fees to custodians of advisory funds." The Bureau s intent in issuing Release 93-2-BD was to ease the Michigan restriction on investment advis ers having access to customer securities or funds for the limited purpose of paymen t for services. It has become clear that the release had significant unintended conseque nces. Since issuing Release 93-2-BD on April 21, 1993, the Bureau has had a number o f advisers come forward and explain that because of the absence of any previous rel eases from the Bureau and the fact that no specific rule existed specifically spell ing out the parameters of the prohibition on custody contained in Section 102(e), many advisers believed the Bureau had accepted the same interpretation as that adopted by the Securities and Exchange Commission. Consequently, it is obvious to the Bureau that a number of investment advisers operating in Michigan are in compliance with the SEC position on constructive custody as set down in Investment Counsel Association of America, Inc., (Sec, 1982), 1982 CCH Dec. 77243, but are not satisfying the requirement of Section 102 of the Michigan Uniform Securities Act as tra ditionally interpreted by the Bureau. The Bureau has evaluated the situation and b elieves that adherence to a strict position on this matter would result in a major di sruption to the industry. The Bureau has received further information in regard to the nature and circumstances of the clients most likely to benefit from the ability to have fees with drawn from their accounts rather than being required to pay for investment advisory servi ces directly. The Bureau had not previously taken into consideration factors such as t he clients desire to insure that the fee is collected out of proceeds from a qualif ied plan rather than the clients current cash flow. In addition, the Bureau has rev iewed information in regard to the likely effect of the Bureaus position on the availabil ity of investment advisory services to small investors and believe that the net effect of the Bureaus position as specified in Release 93-2-BD would be an unacceptable reduct ion on the availability of service by independent registered investment advisers. American LegalNet, Inc. www.USCourtForms.com<<<<<<<<<********>>>>>>>>>>>>> 2Release NO. 93-3-BD IA Custody or Access to Customer Funds Page 2 of 3 As indicated in Release 93-2-BD, the Bureau recognizes that the U.S. Sec urities and Exchange Commission in its Release IA-1000 (17 CFR Part 276) in questi on 5 has taken the position that a person has custody directly or indirectly of c lient funds or securities, has any authority to obtain possession of them or has the ab ility to appropriate them. Accordingly, the SEC position is also that an adviser may be deemed to have custody where the adviser is paid automatically from clie nt funds upon presentation of a bill to the custodian of the clients account. The SEC staff takes the position that the adviser may be deemed not to have custody under these circumstances; however, if (1) the client provides written authorizati on permitting the advisers fees to be paid directly from the clients account held by an independent custodian, (2) the adviser sends to the client and the custodian at th e same time a bill showing the amount of the fee, the value of the clients assets on wh ich the fee was based, and the specific manner to which the advisers fee was calcula ted, and (3) the custodian agrees to send to the client a statement, at least quarterly, indicating all amounts disbursed from the account including the amount of the advisory fees paid directly to the adviser. Action or Interpretation: Effective immediately, the terms and conditions set forth in Release 93- 2-BD are replaced by the provisions of this release. The Bureau will not consider investment advisers to be in violation of Section 102(e) of the Michigan Uniform Securities Act where access to a clients account is obtained pursuant to express wr itten authorization and the following requirements are satisfied: a) The authorization or agreement must be limited to withdrawing contractually agreed upon investment adviser fees. b) The investment adviser must notify the client, in writing by at least fi rst class mail not less than seven (7) days prior to the proposed date of withdrawal, of the exact amount of the proposed withdrawal and the specific manner or basis on which the fee has been calculated. The notice shall advise the client of the opportunity to object to the invoi ced amount and the manner in which the objection shall be made. c) The frequency of fee withdrawal must be specified in the written authorization or agreement. d) The custodian of the account must be advised in writing of the limitatio n on the advisers access to the account. This requirement may be satisfied by furnishing to the custodian a copy of the authorization or agreement. American LegalNet, Inc. www.USCourtForms.com<<<<<<<<<********>>>>>>>>>>>>> 3Release No. 93-3-BD IA Custody or Access to Customer Funds Page 3 of 3 e) The custodian must provide the client, not less than quarterly, a statement indicating all amounts disbursed from the account including, separately, the amount of advisory fees paid. This may be contained in the custodians regular periodic report to the client. f) The client must be able to terminate the written billing authorization o r agreement required by this release at any time. Signed by Carl L. Tyson, Director Corporation & Securities Bureau Dated: June 25, 1993 American LegalNet, Inc. www.USCourtForms.com
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