![]() ![]() For instance, one page on Folio ’s website states:įolios deliver many of the benefits of stocks and mutual funds, and eliminate many of the disadvantages. Folio promotes the ease and personal control in investing in a Folio that result from the confluence of its method and the Internet interface. 1 The investors interact with the firm primarily through the Internet: investors select and rebalance their Folios on web pages located on Folio ’s website. Folio is offering a large number of Ready-to-go Folios, and their contents and types appear to vary considerably. Using the Program, investors can devise a Folio from scratch, or they can choose from a number of "Ready-to-go" Folios created by Folio. After an investor clicks the "rebalance" button on his or her screen, Folio will automatically execute the purchases and sales necessary to reduce to the appropriate size the investor’s holding of each over-weighted stock and increase to the appropriate size his or her holding of each under-weighted stock. Should changes in market valuation alter the actual weighting of their holdings, investors also have the option to "rebalance" the Folio to the chosen weighting. Investors make initial and subsequent purchases of dollar amounts of a Folio, not of a given number of shares of individual stocks. Each stock carries a percentage weight that determines its proportion of a particular Folio. A Folio can include from one to fifty different stocks, chosen from a list of 2,500 stocks. The Program allows investors to acquire "Folios"-baskets or portfolios of stocks that the investor initially purchases in a single transaction. Thus, the facts in this memorandum are based largely on press reports and Folio ’s own promotional materials (available at its website, ). In March it announced its first investment product, Folio, and it has just recently begun to offer and sell products to investors. Its founder, chairman and chief executive officer is Steven Wallman, former SEC commissioner. Factsįolio is a registered broker-dealer incorporated and located in Virginia. Finally, these investor protection concerns are heightened because the basic characteristics of Folio and the Program can be readily replicated by a wide range of promoters seeking to tap the public investment market. Furthermore, the policies underlying the 19 Acts-especially the anti-self-dealing, compensation limitation, independent director oversight, advertising, and disclosure provisions-argue for regulation of the Program and the Folios under these Acts. The Program and Folios also are investment companies under the 1940 Act because they are issuers of securities that are primarily engaged in the business of investing, reinvesting, and trading in securities and because they share many of the essential features of investment companies. Thus, investors in the Program and Folios are purchasing investment contracts from Folio because these features interweave investors’ fortunes with the efforts and success of Folio and the Program and because these features render investors’ success largely dependent upon the efforts of others. These securities derive from the pooling of investors’ assets in the odd lot trade bunching and matching features of the Program, in the investment management involved in rebalancing investors’ "Folios," and in the investment expertise built into "Ready-to-go" Folios. We believe that the Program is issuing, offering, and selling securities that are separate from the underlying securities in investors’ portfolios. Thus, we respectfully suggest that the Division of Investment Management consider the Program’s characteristics in devising an appropriate regulatory response to potential abuse by those who are certain to replicate them. ![]() We believe that Folio is the forerunner of a new wave of technology-driven investment vehicles that, should they not be appropriately regulated, could seriously undercut the investor protections built into the regulatory framework for investment companies and their advisers. We believe that analysis of Folio and the Program under the 19 Acts demonstrates that the Program and its offering and sale should be registered and regulated under these Acts. ("Folio ")-a product that it dubs "Folio" (the "Program")-constitutes the offer and sale of a separate security under the Securities Act of 1933 (the "1933 Act") and an investment company under the Investment Company Act of 1940 (the "1940 Act"). We are submitting this memorandum in order to present our view that the investment product being provided by the broker-dealer Folio Investments Inc. ![]()
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