The Securities and Exchange Commission staff on July 15 issued an interpretive letter to clarify that Rule 206(4)-3, the cash referral fee rule under the Investment Advisers Act of 1940 (Advisers Act) does not apply to payments to compensate a person for soliciting investors to invest in an “investment pool” managed by the adviser. An investment pool is an investment company under the Investment Company Act of 1940, or a company that would be an investment company but for an exclusion under Section 3(c). Rule 206(4)-3 makes it unlawful for any registered investment adviser (or adviser required to be registered) 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 set forth in the Rule.
The staff’s interpretation is based, in part, on the decision in Goldstein v. SEC in which the Court stated 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. The SEC reasoned that the references to “client” in Rule 206(4)-3 (found in the definition of “solicitor”) should not be interpreted to include investors in investment pools.
The SEC has made clear that even if Rule 206(4)-3 does not apply, the solicitor may be required by Section 206 of the Advisers Act to disclose to the investor material facts relating to conflicts of interest. In addition, the SEC did not address whether such activity would result in the solicitor being deemed a “broker” under Section 3(a)(4) of the Securities Exchange Act of 1934.