7.28.2008 In a no-action letter, the SEC took the position that Rule 206(4)-3 under the Investment Advisers Act of 1940 (Advisers Act) does not apply to the payment of a cash fee by an investment adviser to a person solely to compensate that person for soliciting investors to invest in an investment pool managed by the adviser.
Rule 206(4)-3 makes it unlawful for any registered investment adviser to pay a cash fee, directly or indirectly, to a solicitor with respect to solicitation activities unless the payments are made in compliance with conditions specified in the Rule.
The staff reached its conclusion for the following reasons. First, the releases proposing and adopting Rule 206(4)-3 do not contain any statement directly or indirectly suggesting that the Rule would apply to investment advisers' cash payments to others solely to compensate them for soliciting investors for investment pools managed by the advisers. While not dispositive of the issue, the staff believed that the absence of any such statements by the SEC suggests that it did not intend that the Rule should apply to such payments. Second, the Rule, in the staff’s view, was designed so as to clearly apply to solicitations and referrals in which the solicited or referred persons might ultimately enter into investment advisory contracts with the investment adviser; investors in investment pools do not typically enter into investment advisory contracts with the investment advisers of the pools. Third, the Rule's use of the terms "client" and "prospective client," rather than "investor" or "prospective investor," suggests that the Rule was intended to apply to solicitations and referrals in which the solicited or referred persons might ultimately enter into investment advisory contracts with the investment adviser. The SEC also cited Goldstein, et al. v. Securities and Exchange Commission, 451 F.3d 873 (D.C. Cir. 2006), where the court indicated that, for purposes of Section 206 of the Advisers Act, investors in a pooled investment vehicle are not "clients" of the investment adviser of the pool.
Click http://www.sec.gov/divisions/investment/noaction/2008/mayerbrown072808-206.htm#P15_323 for a copy of the no-action letter. The staff noted that its July 28, 2008 no-action letter replaces the no-action letter that it issued on July 15, 2008. It was replaced to make minor, non-substantive changes.