The Money Management Institute of Washington D.C. has taken exception to the Investment Company Institute's request that the SEC re-examine a rule that grants managed accounts an exemption to the Investment Company Act of 1940, according to a memorandum the Institute sent to its membership Aug. 29.

The Institute claims that Craig Tyle, the general counsel for the ICI, requested the SEC re-examine the parameters of rule 3a-4, while speaking at a roundtable conference sponsored by the SEC, according to a copy of the memorandum.

Rule 3a-4 provides separately-managed accounts an exemption from the definition of an investment company and requires that the product provide individualized advice to investors.

But the ICI does not want the SEC to reexamine Rule 3a-4, said Chris Wloszczyna, a spokesperson for the ICI.

"I don't know if they misinterpreted something or if that's their interpretation of what Craig said," said Chris Wloszczyna. "I just don't know."

The ICI did file a memorandum with the SEC July 12, requesting that the SEC consider regulating web-based portfolio products under the Investment Company Act because they do not fall under Rule 3a-4, Wloszczyna said. Referring to FOLIOfn baskets of securities, the ICI memorandum states, "The Program as presently designed would not provide sufficient individualized attention to investors in Folios to meet the conditions or the policy objectives of Rule 3a-4. Rule 3a-4 contemplates that a program would provide individualized attention in the form of human interaction rather than the Internet interface."

Still, the Money Management Institute claims that is not what Tyle said at the meeting.

"We know what Craig (Tyle) said because we had our counsel there," said Christopher L. Davis, executive director of the Institute.

The Institute's memorandum was written in reaction to Tyle's statement, Davis said.

"(We're) telling our members that we are vigilant and we certainly don't intend to have the 1940 Act applied to us," he said.

The Institute agrees that there should be greater regulation of web-based portfolio products, but by requesting a re-examination of rule 3a-4, the ICI has essentially lumped managed accounts with online products like FOLIOfn accounts.

There is a significant difference between the two products, Davis said. FOLIOfn accounts allow investors to customize their own portfolios of stocks for low minimum investments, he said. Those products "probably are deserving of additional regulatory scrutiny, but the scrutiny has already been applied to us," he said.

Separately-managed accounts offer the same amount of investor protection as mutual funds, if not more, Davis said. They often have several different layers of regulation that apply to them, depending on whether the company that is offering them is registered as an adviser or a broker/dealer, he said. The products also face another level of due diligence by the brokerage firms that sell them, he said.

Rule 3a-4 was enacted 10 years ago and sets several standards by which separately-managed accounts and similar products must abide. The rule mandates that discretionary investment advisory programs meet five criteria relating to individual investors' access to customized management services. Under the rule, programs must tailor an account for individual investors' objectives, provide access to the manager and sponsor of each account and each investor must be able to impose investment restrictions. The accounts must also issue quarterly statements listing all trades as well as certificates of ownership for all securities held in the account.

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