## Facts

- Clarke Lanzen Skalla Investment Firm, Inc. (CLS) was an investment adviser registered with the Securities and Exchange Commission (SEC).
- CLS offered an investment program for clients with discretionary accounts in which clients selected one of six investment strategies.
- For each strategy, CLS selected a mix of mutual funds and invested participating clients’ assets in those funds.
- After a client selected a strategy, the client’s assets were pooled and invested identically with the assets of other clients who selected the same strategy.
- CLS used one custodian for all program client assets.
- The custodian opened one account, in the custodian’s name for the benefit of CLS, with each mutual fund; each such account reflected all shares of that fund owned collectively by CLS program clients.
- After clients enrolled, CLS did not later contact them to determine whether the selected strategy, or the program’s investments, continued to meet their needs or objectives.
- Program clients were not provided semiannual or annual reports for the mutual funds held through the program.
- Program clients could not pledge, hypothecate, or withdraw their mutual-fund shares from the program.
- The SEC brought an administrative proceeding alleging that the program violated the Investment Company Act of 1940 by operating as an unregistered investment company.

## Issues

1. Whether CLS’s mutual-fund strategy program, which pooled client assets and limited clients’ indicia of ownership and information rights, operated as an “investment company” required to register under the Investment Company Act of 1940.

## Decision

- The SEC determined that CLS’s program functioned as an investment company and that operating it without registration violated the Investment Company Act of 1940.
- The SEC resolved the matter through an administrative order requiring CLS to address the program’s regulatory status and compliance obligations.

## Legal Principles

- An arrangement presented as discretionary advisory accounts may be treated as an investment company when, in operation, client assets are pooled and managed in a standardized manner akin to a collective vehicle.
- Pooling and identical investment of multiple clients’ assets in the same portfolio can indicate that investors hold interests in a program-level vehicle rather than direct, account-level ownership of portfolio securities.
- Use of omnibus-style custody accounts—where a custodian holds mutual-fund positions in its own name for the benefit of the adviser and reflects clients’ holdings only in the aggregate—can support a finding that the program resembles a pooled product.
- Lack of periodic client contact to reassess suitability after enrollment supports characterizing the program as standardized management rather than ongoing individualized advisory management.
- Restrictions that prevent clients from pledging, hypothecating, or withdrawing the underlying mutual-fund shares, together with failure to provide mutual-fund reports through the program, weigh toward treatment as an investment company subject to the Investment Company Act.

## Conclusion

In *In the Matter of Clarke Lanzen Skalla Investment Firm, Inc.*, the SEC concluded that CLS’s discretionary mutual-fund program crossed the line from separate-account advice to a pooled vehicle because clients’ assets were combined and invested identically through omnibus custody accounts, clients received limited ongoing suitability review, and clients lacked common ownership and information rights in the underlying mutual funds; as a result, the program was treated as an unregistered investment company under the Investment Company Act of 1940.


In the Matter of Clarke Lanzen Skalla Investment Firm, Inc., Investment Advisers Act Release No. 1501 (1995)