SEC Grants No-Action Relief to Amerivest Regarding Advisory Fee Rebates (with Lofchie Comment)

The Division of Investment Management issued a letter stating that it will not recommend enforcement action against Amerivest under Section 205(a)(1) of the Investment Advisors Act of 1940 if Amerivest enacts a proposed advisory fee rebate program.

Section 205(a)(1) generally prohibits registered investment advisers from receiving performance-based compensation because such compensation encourages advisers to take undue investment risks.

The SEC provided no-action assurance to Amerivest for several reasons, including the following: (a) Amerivest will disclose the rebate terms to eligible investors and notify investors of any changes to the terms, (b) investors will receive the fee rebate due to negative investment performance, but there is no "catch up" for Amerivest with respect to future appreciation, and (c) a third-party investment adviser (Morningstar Associates) makes investment recommendations to Amerivest, which generally does not deviate from those recommendations, and the third party's fee is not impacted by payment or nonpayment of the rebate.

Lofchie Comment: One of the significant reasons given by the SEC for permitting the fee arrangement was that Amerivest, the investment adviser receiving the relief, had very limited discretion as to the actual investment decisions made with respect to the client's account; i.e., the investment decisions were intended to be based largely on recommendations by Morningstar Associates. Thus, the precedential value of the letter may be somewhat limited.

See: SEC No-Action Letter.