In 1997, the SEC adopted Rule 3a-4 of the Investment Company Act of 1940 (the "Rule") which provides a non-exclusive safe harbor to exclude certain similarly-managed accounts, such as model portfolios, from the definition of an investment company ( e.g., a mutual fund). In short, the Rule requires that each client receive individualized investment treatment. The conditions that must be met in order to fall under Rule's safe harbor are as follows:
- Each client's account must be managed on the basis of the client's financial situation and investment objectives and any reasonable investment restrictions the client may impose;
- The investment adviser must obtain sufficient client information to be able to provide individualized investment advice to the client;
- The investment adviser and/or the portfolio manager must be reasonably available to consult with the client;
- Each client must be able to impose reasonable investment restrictions on the management of the account;
- Each client must receive a quarterly statement with a description of all account activity; and
- Each client must retain certain indicia of ownership of the securities and funds in the account ( e.g., the ability to withdraw securities, vote securities, etc.).
