SEC Permits Broker-Dealer Affiliates to Purchase Fractional Shares from Advisory Client Accounts

The SEC Division of Investment Management granted no-action relief to a global advisory firm from compliance with the disclosure and consent requirements of Investment Advisers Act Section 206(3). The requirements concern the disposition of client positions that consist of "fractional shares," which cannot be sold in the open market.

The relief is based on appropriate disclosures made in advance, equitable pricing and sale of the fractional shares, and the lack of any commissions charges in connection with such sales.

Specifically, the relief is contingent on the following conditions that were cited in this case:

• the value of the fractional shares will be immaterial with respect to (i) each applicable client and (ii) the adviser and its broker-dealer affiliate;

• in connection with a sale of the corresponding whole shares, the adviser or its broker-dealer affiliate will purchase fractional shares on the same day and at the same price as the whole shares;

• in connection with an event other than a sale, the adviser or its broker-dealer affiliate will purchase fractional shares at that day's closing market price;

• neither the adviser nor its broker-dealer affiliate will receive any commission or other compensation in connection with the purchase of fractional shares;

• because the purchase of fractional shares will be connected always to the ordinary course of the sale or transfer of the related whole shares that are held in the client's account, the adviser will not determine the timing of the principal transaction separately; and

• the adviser will make advance disclosures to clients of the practice of purchasing fractional shares in a separate disclosure document, the advisory agreement or the adviser's Form ADV, and such purchases also will be reflected in the clients' trade confirmation and account statements and will be identified as principal trades.