Applicability of exemptive provisions under SEC Rule 206(4)-2 to broker/dealers which are registered as Investment Advisors and receive investment advisory fees in advance.

The purpose of this notice is to alert all NASD member firms which are registered as both an investment advisor and as a broker/dealer ("BD/IA Firm") of an important interpretive position taken by NASD, and confirmed with the SEC. MGL Consulting Corporation has been advised by both the NASD and the SEC that to the extent a BD/IA Firm collects its advisory fees in advance, and any portion of such fees is refundable upon termination of the advisory agreement by the client, then the broker/dealer would be considered to be holding customer funds pursuant to SEC Rule 15c3-3 and would thus be required to maintain a minimum net capital requirement of not less than $250,000 in accordance with SEC Rule 15c3-1. MGL Consulting Corporation has been further advised by the Staff that to the extent the BD/IA Firm receives its advisory fees through its clearing broker and those fees are held at the clearing broker in a non-segregated account of the broker/dealer, the firm would still be required to be a $250,000 broker/dealer as they would not meet the exemptive provisions established under Rule 206(4)-2 of the Investment Advisors Act of 1940. MGL Consulting Corporation therefore strongly urges all firms which are registered as both a broker/dealer and an investment advisor, to carefully review their Investment Advisory Agreements and or Managed Account Agreements with their legal counsel to determine the applicability of this position to their firm's business structure.

The logic behind the Staffs' position is that to the extent an advisory client terminates their relationship with the BD/IA Firm at any time prior to the end of the period for which the fees were collected by the firm, then the BD/IA Firm would be obligated to pro-rate their fees and to rebate/refund the difference to the client. Based upon the fact that the advisory client can at any time terminate their relationship with the BD/IA Firm, once the BD/IA Firm collects its fees in advance, then the BD/IA Firm is holding those fees in trust for the client as un-earned fee income.

BD/IA Firms which collect their fees in arrears, and or whose fees are non-refundable would not appear to be subject to this interpretive position.