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

HISTORY OF RULE 3A-4

Although the first SMA was opened in 1973 and the first full SMA program (E.F. Hutton Select Managers program) was launched by Jim Lockwood at E.F. Hutton in 1987, it was not until March 24, 1997, that the SEC adopted Rule 3a-4 under the 1940 Act (Rule 3a-4) to provide a nonexclusive safe harbor from the definition of the term investment company for certain programs under which investment advisory services are provided on a discretionary basis to a large number of advisory clients having relatively small amounts to invest.7 Rule 3a-4 continues today as the governing structure for SMA programs; compliance with the rule allows SMA programs to avoid registration as a mutual fund under the 1940 Act.

The SEC originally proposed a precursor to Rule 3a-4 in 1980, “which would have provided a safe harbor for investment management services affording clients individualized treatment. The rule was not adopted at that time due to public opposition.”8 Between 1980 and 1995 (when the SEC reproposed Rule 3a-4), the SEC staff “issued a number of no-action letters that were based, in large part, on representations that the programs would comply with the proposed [1980 version] of Rule 3a-4.”9 Although this is an unusual trajectory in the world of securities regulation, the SEC has over time provided substantial guidance on the structure of SMA programs and related issues through no-action letters.

In 1997, at the time Rule 3a-4 was adopted, the SEC summarized the new rule's ...