At an open meeting on September 19, 2007, the Securities and Exchange Commission (the “SEC” or “Commission”) adopted a new temporary rule, Rule 206(3)-3T (the “Temporary Rule”) on an interim final basis, that provides investment advisers who also are registered as broker-dealers under the Securities Exchange Act of 1934 (the “Exchange Act”) (“Dual Registrants”) with an alternative means to meet the requirements of Section 206(3) of the Investment Advisers Act of 1940, as amended (the “Advisers Act”) when they act in a principal capacity in transactions with certain of their advisory clients. The Commission also proposed an interpretive rule under the Advisers Act that would clarify its application to certain activities of broker-dealers (the “Interpretive Rule”) (collectively, along with the Temporary Rule, the “Rules”). The Temporary Rule will take effect on September 30, 2007.

The Rules were drafted by the Division of Investment Management in response to the U.S. Court of Appeals for the D.C. Circuit, in Financial Planning Association v. SEC (March 30, 2007) (the “FPA Decision”), striking down Rule 202(a)(11)-1 under the Advisers Act (the “Prior Rule”). The Prior Rule provided that a broker-dealer would not be deemed to be an investment adviser simply by virtue of its receipt of fee-based compensation. To avoid a potentially adverse impact on investors when the court’s decision takes effect on October 1, 2007, the Temporary Rule provides clients that are currently in fee-based brokerage accounts an option other than being forced to transition to either a transaction-based brokerage account or an investment advisory account that would be effectively prohibited from engaging in principal trades (thus, potentially reducing their ability to, or increasing the costs of, engaging in transactions in certain securities such as municipal bonds). The Interpretative Rule would clarify the application of the Advisers Act to certain activities of broker-dealers in light of the FPA Decision

The Temporary Rule

The Temporary Rule provides Dual Registrants an alternative means of complying with the requirement to provide written notice and obtain client consent under Section 206(3) of the Advisers Act for principal trades executed for certain non-discretionary advisory clients. The Temporary Rule applies to any principal trade with a non-discretionary client that does not involve (1) a security issued by the Dual Registrant (or by an affiliate of the Dual Registrant), or (2) a transaction in which the Dual Registrant (or an affiliate of the Dual Registrant) acts as underwriter, other than offerings involving investment-grade debt securities. A Dual Registrant wishing to engage in principal transactions with these clients must first provide written notice to, and obtain a blanket written consent from, the client. The disclosure provided by the Dual Registrant must convey that the consent entered into by a non-discretionary client is fully revocable at all times without penalty.

The written notice and consent are required to be given and received only once, and may be part of the account application materials or may be provided to the client separate from other account documentation. Upon receiving such blanket written consent, Dual Registrants relying on the Temporary Rule must inform these clients orally or in writing prior to each trade that the firm may effect with the client on a principal basis, and the client must consent to the trade. The confirmation provided to the client under Rule 10b-10 of the Exchange Act must indicate when the firm acts as principal in the transaction with the client and must disclose that the adviser informed the client that it may act in a principal capacity and that the client authorized the transaction. On an annual basis, Dual Registrants must also provide each of their non-discretionary clients with a list of all principal trades effected in their accounts during the prior year.

The Temporary Rule will expire and no longer be effective on December 31, 2009. The SEC believes this will provide sufficient time to monitor the effectiveness of the Temporary Rule, consider the results of the investment adviser/broker dealer regulatory system study being conducted for the SEC by the RAND Corporation and make appropriate regulatory changes.

The Interpretive Rule

The FPA Decision also cast significant doubt upon four common interpretations of the Commission under the Advisers Act. To qualify for the broker-dealer exception under the Advisers Act, a broker-dealer’s provision of investment advisory services must be (1) “solely incidental” to their brokerage activity and (2) it must not receive “special compensation” for such investment advice. Accordingly, it was noted at the open meeting that the Interpretative Rule should reaffirm the following interpretations previously promulgated under the Prior Rule:

(1) A broker-dealer that separately contracts, or charges a separate fee, for investment advisory services strongly suggests that such advice is not “solely incidental” to their brokerage activity.

(2) A broker-dealer who exercises investment discretion strongly suggests that that such advice is not “solely incidental” to their brokerage activity.

(3) A broker-dealer would not be deemed to receive “special compensation” simply by virtue of charging a “mark-up” or “mark-down” from one client to another.

(4) Dual Registrants are considered investment advisers solely with respect to those accounts for which they provide services that subject them to the Advisers Act.