The staff of the SEC’s Division of Investment Management (the “Staff”) granted no-action relief with respect to the rebate of advisory fees by Amerivest Investment Management, LLC (the “Adviser”) to eligible clients for which it implements third-party model portfolios of mutual funds and ETFs (the “Program”) when the performance composite for the applicable model portfolio experiences two consecutive discrete calendar quarters of negative performance (before advisory fees) during a twelve-month period.
The Program. The Program consists of the Adviser’s implementation of asset allocation models and corresponding mutual fund and exchange-traded fund (ETF) investment recommendations provided by Morningstar Associates, LLC (“Morningstar”), which serves as investment adviser and independent consultant to the Adviser with respect to the Program, but does not enter into an investment advisory agreement with the Adviser’s clients. The Adviser deviates from Morningstar’s recommendations solely: (i) for non-investment and non-performance related reasons such as tax considerations (e.g., the tax ramifications of substituting one ETF for another) or reasonable client restrictions; or (ii) to the extent required by its fiduciary duty to clients. The Adviser maintains a record of each deviation and the reason for it.
The Rebate. If the model portfolio in which an eligible client is invested experiences two consecutive discrete calendar quarters of negative performance (before advisory fees) during a twelve-month period (“Term”), the Adviser will automatically rebate the client’s advisory fees for the Program for those two quarters. A client will not have to elect to receive a rebate, or request a rebate. Performance for each calendar quarter is measured independently. The Adviser may extend the Term for additional twelve-month periods or discontinue the rebate arrangement following notice to clients (as discussed below). There will be no “catch up” or other provision allowing the Adviser to recapture foregone fees through future appreciation. The Adviser may not deviate from or otherwise seek to influence Morningstar’s recommendations for the purpose of avoiding a rebate, and the mere fact that the Adviser deviates from or declines to implement a recommendation from Morningstar will not – in and of itself – make a client ineligible for a rebate. There will be no arrangement or understanding between the Adviser and Morningstar or any of their principals under which Morningstar’s compensation or continued engagement may be affected by whether the Adviser pays a rebate to Program participants.
Client Eligibility. The Adviser will implement the rebate arrangement for (i) all new discretionary client accounts, and (ii) all existing discretionary client accounts with a new deposit of $25,000 or higher, provided that the new deposit represents net new assets to the Adviser. To be eligible for the rebate, an account must participate in the Program for a minimum of two consecutive calendar quarters during the Term, and during such participation the client must not withdraw more than the required deposit of $25,000 to remain eligible for subsequent quarters. Except for enforcing the eligibility requirements, the Adviser will not take any action for the purpose of negating or compromising a client’s eligibility for the rebate, including, without limitation, any action that would result in a client no longer participating in the Program.
Disclosure to Clients. The Adviser will fully and clearly disclose the rules governing eligibility for the advisory fee rebate and the methodology for calculating model portfolio performance (together, the “Rebate Terms”) to all clients participating in the Program. The Adviser must provide clients notice of any change in the Rebate Terms that will disadvantage them and may not implement such a change prior to the commencement of the next subsequent Term. The Adviser will provide ninety days advance written notice to clients if it elects to extend the Term for additional twelve-month periods or discontinue the rebate arrangement.
Relief. Section 205(a)(1) of the Investment Advisers Act of 1940 generally prohibits registered investment advisers from entering into, extending, renewing or performing any investment advisory contract that provides for compensation to the investment adviser on the basis of a share of capital gains or capital appreciation in a client’s account or any portion thereof. In Investment Advisers Act Release No. 721 (May 16, 1980), the Staff stated that the concerns animating the performance fee ban “are as apposite to advisory fees which are contingent upon an advisory account obtaining a certain level of performance as they are to fees which vary directly with capital gains or appreciation.” In granting relief for the Adviser’s proposed fee rebate, the Staff cited numerous aspects of the proposed rebate arrangement, but referred particularly to the role of Morningstar in selecting securities and making asset allocation recommendations and the limited discretion the Adviser would have to deviate from such recommendations as helping to “alleviate the concerns that form the basis of Section 205(a)(1).”