Rule 3a-4: Are Your Model Portfolios Really Investment Companies?

In 1997, the SEC adopted Rule 3a-4 of the Investment Company Act of 1940 (the “Rule”) which provides a non-exclusive safe harbor to exclude certain similarly-managed accounts, such as model portfolios, from the definition of an investment company (e.g., a mutual fund).  

In short, the Rule requires that each client receive individualized investment treatment. The conditions that must be met in order to fall under Rule’s safe harbor are as follows:

  • Each client’s account must be managed on the basis of the client’s financial situation and investment objectives and any reasonable investment restrictions the client may impose;
  • The investment adviser must obtain sufficient client information to be able to provide individualized investment advice to the client;
  • The investment adviser and/or the portfolio manager must be reasonably available to consult with the client;
  • Each client must be able to impose reasonable investment restrictions on the management of the account;
  • Each client must receive a quarterly statement with a description of all account activity; and
  • Each client must retain certain indicia of ownership of the securities and funds in the account (e.g., the ability to withdraw securities, vote securities, etc.).

In addition, the Rule requires that investment advisers provide quarterly written reminders to notify the adviser of any changes in the client’s financial situation, and also make an annual effort to update the client’s information.

Investment advisers who make use of model portfolios or other similar investment strategies and wish to take advantage of the Rule’s safe harbor should review their compliance programs to help ensure conformance with the Rule’s requirements for the safe harbor.

For additional information please contact Brent Cunningham, Associate by email at  or by phone at (619) 298-2880.


1 Comment

Filed under Investment Advisers

One response to “Rule 3a-4: Are Your Model Portfolios Really Investment Companies?

  1. Outstanding post but I was wanting to know if you could write
    a litte more on this subject? I’d be very grateful if you could
    elaborate a little bit further. Thank you!

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