Interpretive Letter to Robert C. Hacker, Esq., Kirkpatrick & Lockhart, LLP

May 29, 2003

Robert C. Hacker, Esq.
Kirkpatrick & Lockhart, LLP
1800 Massachusetts Avenue, NW
Second Floor
Washington, DC 20036-1221

Re: Linsco/Private Ledger Corp.

Dear Mr. Hacker:

This letter responds to your letter dated March 5, 2003 on behalf of Linsco/Private Ledger Corp. ("LPL"). Your letter requests our concurrence that LPL’s use in its communications with the public of statements that it does not offer any "proprietary" investment products is consistent with the standards of NASD Rule 2210 under the circumstances described in your letter. Subject to the understanding we have of your proposed program as described in your letter and our subsequent conversations with you, we concur that LPL’s statement that it does not sell any proprietary investment products generally would not be misleading for purposes of Rule 2210.

Background

LPL is a registered broker/dealer that is also registered as an investment adviser under the Investment Advisers Act of 1940. Your letter states that LPL does not offer its customers any proprietary investment products or engage in any investment banking activities, and frequently cites these facts in its sales material as evidence that its representatives’ investment advice is independent and objective. LPL is proposing to offer its clients a new family of mutual funds called the "Best of Breed" Funds (the "Funds"). LPL clients would be able to invest in the Funds through their current LPL brokerage accounts or through a new dedicated non-discretionary brokerage account that would enable client participation in an asset allocation program using the Funds as the underlying investment options. Third-party brokerage firms not affiliated with LPL also could sell the Funds.

Each Fund would be a separate series of a new registered open-end investment company organized as a Delaware trust (the "Trust"). The Trust initially offers four classes of shares in six separate funds, each with different investment objectives. The Trust’s board of trustees (the "Board") would have overall responsibility for management of the Trust. A majority of the Board would be composed of trustees who are not "interested persons" (as defined in the Investment Company Act of 1940 ("1940 Act")) of the Trust, any of its investment advisers, or LPL.

The Funds would operate as "manager of managers" funds, in that two or more investment sub-advisers would be appointed to manage the assets of each Fund, subject to the oversight of the Board and the Trust’s primary investment adviser. Each Fund’s assets would be divided into multiple portions, each of which would be managed by a different sub-adviser based on that sub-adviser’s expertise and the investment strategy designated for that portion.

Investment Adviser’s Role

A registered investment adviser that is not affiliated with LPL (the "Investment Adviser") would serve as the investment adviser to the Trust. The Investment Adviser would be responsible for managing the investment and reinvestment of each Fund’s assets in conformity with the Fund’s investment objectives, policies and restrictions. The Trust’s investment advisory agreement would permit the Investment Adviser to delegate its advisory responsibilities to one or more sub-advisers, subject to board approval. The Investment Adviser would receive a fee from the Trust, computed separately for each Fund and stated as an annual percentage of the current net asset value of each Fund.

The Investment Adviser would determine whether to employ, maintain or terminate a Fund’s sub-adviser and would designate that portion of a Fund’s assets that a particular sub-adviser would manage.¹ The Investment Adviser would be responsible for evaluating existing and prospective sub-advisers, submitting recommendations to the Trust’s board concerning sub-advisers that a particular Fund may employ, monitoring and reporting to the Board concerning sub-advisers’ investment results, coordinating the sub-advisers’ investment activities, and ensuring compliance with applicable investment restrictions and limitations. The Investment Adviser would negotiate the sub-advisory fees for each sub-adviser, which the Investment Adviser would pay to the sub-advisers out of its own fee. You expect that initially the Board would select approximately 12 to 15 different sub-advisers for the Funds.

The Investment Adviser also would serve as the Trust’s administrator pursuant to an administrative agreement with the Trust. Under this agreement, the Investment Adviser would be responsible for financial and tax reporting, portfolio compliance, regulatory affairs and governance matters, general administration and accounting services. The Investment Adviser also would be responsible for coordinating and managing the Trust’s relationships with its various service providers, performing trust operational management, including development of control procedures and monitoring of all service providers’ performance, and proposing and carrying out the Trust’s policies. The Trust would pay the Investment Adviser a separate administration fee for these services. The administration agreement would permit the Investment Adviser to retain third parties and to delegate all or part of its administrative responsibilities to one or more such parties.

LPL’s Role

LPL proposes to enter into an investment consulting agreement (the "Consulting Agreement") with the Investment Adviser under which LPL would assist the Investment Adviser in determining whether to employ, maintain or terminate sub-advisers for the Funds. In particular, LPL would provide monthly Fund fact sheets describing the performance of each Fund as a whole and of each separately managed portion thereof. These fact sheets may be distributed to the Board and registered representatives who sell Fund shares. LPL would also provide quarterly analysis packages in connection with each Board meeting consisting of statistical information and analysis regarding Fund and sub-adviser performance to aid the Investment Adviser’s preparation and presentation of quarterly reports to the Board. LPL also would meet with sub-advisers selected by the Investment Adviser to discuss their performance and would prepare reports regarding their evaluations. LPL also would assist the Investment Adviser with its Board responsibilities by providing potential Fund sub-adviser options for various asset classes.

You have represented that LPL’s functions under the Consulting Agreement would not cause it to be considered an investment adviser or sub-adviser to the Trust or the Funds under the 1940 Act. In this regard, LPL would not recommend the selection, maintenance or termination of any sub-adviser. The Investment Adviser would have full authority and responsibility for these decisions, as well as the responsibility for overseeing the management of the Funds’ assets. In addition, the Investment Adviser would not rely exclusively on information provided by LPL in making decisions regarding whether to select or retain particular sub-advisers. The Investment Adviser would perform substantive, independent evaluations of current and potential sub-advisers based on information provided by a variety of sources, including LPL. In this regard, LPL would not perform any services that the Investment Adviser itself was incapable of performing. LPL would supplement the analysis already being conducted by the Investment Adviser.

LPL would provide assistance with the evaluation of sub-advisers only to the extent the Investment Adviser requested and directed such assistance, and would be subject to the Investment Adviser’s supervision at all times. LPL would not interact directly with the Trust except in minor ways to facilitate providing investment consulting services to the Investment Adviser. LPL would not make recommendations to the Board regarding the selection or retention of any sub-adviser.²

LPL would receive a fee from the Investment Adviser for its consulting services equal to 0.15% of the net assets of each Fund per annum. The Investment Adviser would pay this fee to LPL from its own resources.

In addition to serving as a consultant to the Investment Adviser, LPL also would serve as a sub-administrator to the Trust to assist the Investment Adviser in the performance of sub-accounting, networking and shareholder servicing under the administration agreement with respect to Fund shares held by LPL accounts. The Investment Adviser would pay LPL a sub-administrative fee equal to 0.25% to 0.35% per annum of the net asset value of Fund shares held by LPL accounts.

You have represented that neither LPL nor any LPL affiliate would act as principal underwriter of the Trust. However, LPL would enter into a selling agreement with the Trust’s principal underwriter pursuant to which LPL would receive sales compensation for selling shares of the Funds. Other than the services described above, LPL would not have any other relationship with and would not provide any other services to the Trust, the Funds or the Investment Adviser.

You have represented that all communications with the public concerning the Funds that may be viewed by current or prospective LPL clients (including advertisements, sales literature and correspondence) would prominently disclose that LPL receives consulting and sub-administrative fees from the Investment Adviser with respect to the Funds. To the extent that any LPL communication with the public regarding the Funds states that LPL does not offer any proprietary products, the disclosures regarding LPL’s relationships with the Funds will be in close proximity to this statement.

Discussion

NASD Rule 2210(d)(1)(A) requires member communications with the public to be based upon principles of fair dealing and good faith and to provide a sound basis for evaluating the facts regarding any product or service offered. Rule 2210(d)(1)(A) also prohibits such communications from omitting any material fact or qualification if the omission would cause the communication to be misleading. Rule 2210(d)(1)(B) prohibits member communications from including any false, exaggerated, unwarranted or misleading statement.

You have requested our concurrence that it would not be misleading under Rule 2210 if LPL included in its public communications statements that it does not offer proprietary investment products, notwithstanding LPL’s proposed roles with respect to the Funds. In this regard, you believe that LPL’s proposed roles as investment consultant and sub-administrator would not render the Funds "proprietary" funds of LPL. You note that mutual fund complexes routinely retain unaffiliated third parties to provide administrative or sub-administrative services to the funds without rendering the funds proprietary products of those companies.

You also observe that neither the NASD Rules nor the federal securities laws define the term "proprietary." However, you contend that this term commonly refers to something of or relating to a proprietor, or owner, that runs a business. You argue that the Investment Adviser, as investment adviser and administrator of the Funds, is the entity most closely associated with operating the business in the present case, rather than LPL.

We agree that, under the facts as described in your letter, it would not be misleading under Rule 2210 for LPL to state in its public communications that it does not offer proprietary products, notwithstanding its role with respect to the Funds. This conclusion is based in part on the fact that LPL will not serve as either the principal underwriter or an investment adviser or sub-adviser to the Funds. Our conclusion is limited to the facts as described in your letter. Should LPL’s roles change or should LPL take on additional roles with regard to the Funds, NASD staff would be required to reconsider this conclusion.

Please note that the opinions expressed herein are staff opinions and have not been reviewed or endorsed by the Board of NASD. This letter responds only to the issues you have raised based on the facts you have described and does not address any other rule or interpretation of NASD, or all the possible regulatory or legal issues involved. Moreover, the letter does not address any other aspect of the application of Rule 2210 to LPL’s sales material.

If you have any questions, please do not hesitate to call me at (240) 386-4534.

Sincerely,

Joseph P. Savage
Counsel
Investment Companies Regulation

1 You have stated that the Trust would apply for a “manager of managers” exemptive order from the Securities and Exchange Commission contemporaneously with the filing of its initial registration statement in order to conduct these activities.

2 NASD staff is relying on your representation that LPL’s consulting and other activities would not cause it to be considered an investment adviser or sub-adviser to the Trust or the Funds for purposes of the 1940 Act. NASD staff has not analyzed and has no opinion on this issue.