"Constructive Delivery" of Mutual Fund Prospectuses to Discretionary Investment Advisers

We are pleased to share a significant and positive outcome to MMI's advocacy efforts to advance the interests of our members by obtaining guidance from the SEC staff that a broker-dealer can satisfy its prospectus delivery obligations under the federal securities laws by delivering prospectuses to investment advisers in managed account programs instead of their clients. The requirement to deliver prospectuses to clients has been burdensome and costly and resulted in clients being deluged with prospectuses they frequently do not wish to receive because they have hired an investment adviser to manage their accounts. 

Specifically, the Division of Corporation Finance responded yesterday to a request for interpretive guidance submitted on MMI's behalf on April 2, 2019 by Morgan Lewis.

The response (which you can view in full here) states that:

"For purposes of Section 5(b)(2) of the Securities Act, the Division is of the view that a broker-dealer may satisfy its obligations under Section 5(b)(2) to deliver a prospectus to a client of an investment adviser purchasing shares of a Mutual Fund by delivering the Mutual Fund prospectus to the investment adviser so long as the broker-dealer has actual knowledge that the client has authorized the investment adviser, consistent with its fiduciary duties, to manage the client's account on a discretionary basis and to accept delivery of Mutual Fund prospectuses on behalf of the client."

MMI's request, on which the Division of Corporation Finance commented, provides that a broker-dealer could establish knowledge of the investment adviser's authority through: (i) knowledge that the investment advisory relationship between the client and the investment adviser includes authorization to receive prospectuses; (ii) obtaining representations from the investment adviser that it has the authority to manage the client's account on a discretionary basis and receive prospectuses on behalf of the client; or (iii) confirming with the client that the client's investment adviser has the authority to manage the client's account on a discretionary basis and to receive prospectuses on behalf of the client. Correspondingly, broker-dealers may wish to consider revisions to their standard documentation and agreements to take advantage of the new relief.

By way of background, MMI's efforts regarding Section 5(b)(2) of the Securities Act began in 2014. The efforts started with the Division of Investment Management, which oversees mutual funds and other investment products, and then the Division of Trading and Markets, which oversees broker-dealers to get their input, feedback, comments and, ultimately, their concurrence. We then submitted comments to the Division of Corporate Finance and incorporated their resulting changes and direction to arrive at this outcome.

This no-action letter will drive real benefit to our member firms - both in terms of cost savings and sustainability improvements, but, most importantly, by enhancing the investor experience with advisory accounts. We hope you agree that this result is a tangible benefit of MMI membership and a demonstrable use of your MMI membership dues.