Global Securities Markets: Navigating the World's Exchanges and OTC Markets

APPLICABILITY OF THE ADVISERS ACT

A sponsor of a wrap fee or SMA program12 usually meets the definition of “investment adviser”13 under the Advisers Act and is required to be registered with the SEC. The Advisers Act defines a wrap fee program as “a program under which any client is charged a specified fee or fees not based directly upon transactions in a client's account for investment advisory services (which may include portfolio management or advice concerning the selection of other investment advisers) and execution of client transactions.”14 Each money manager in a wrap fee program is also generally registered as an investment adviser, unless subject to an applicable exemption, such as a bank would be.

Both the sponsor of an SMA program and a money manager participating in the program have significant disclosure obligations under the Advisers Act.

In 1994 the SEC adopted Rule 204-3(f) under the Advisers Act, requiring sponsors of SMA programs to provide investor clients with a disclosure brochure, called a Schedule H.15 The Schedule H includes a detailed description of the SMA program, including the services provided, fees charged, and the sponsor's practices relating to the selection and retention of portfolio managers, to name a few. The Schedule H must be delivered to investor clients initially before entering into a contract, and a supplement must be delivered annually thereafter and at such times as material changes are made to the disclosure document. Each money manager ...