Investment Advisers Act of 1940
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
IM Ref. No. 200342891
DIVISION OF INVESTMENT MANAGEMENT
File No. 8-15204
We would not recommend enforcement action to the Commission under Section 206(4) of the Investment Advisers Act of 1940 ("Advisers Act") and Rule 206(4)-3 thereunder if any investment adviser that is required to be registered pursuant to Section 203 of the Advisers Act pays to U.S. Bancorp Piper Jaffray Inc. ("Piper Jaffray"), a registered broker-dealer and investment adviser, or any of Piper Jaffray's associated persons, as defined in Section 202(a)(17) of the Advisers Act, a cash fee, directly or indirectly, for the solicitation of advisory clients in accordance with Rule 206(4)-3,1 notwithstanding a judgment of injunction from the United States District Court for the Southern District of New York (the "Final Judgment") that otherwise would preclude such an investment adviser from paying Piper Jaffray a solicitation fee.2
Our position is based on the facts and representations in your incoming letter dated October 29, 2003, particularly Piper Jaffray's representations that:
This position applies only to the Final Judgment and any State Judgment3 and not to any other basis for disqualification under Rule 206(4)-3 that may exist or arise with respect to Piper Jaffray or any of its associated persons.
Sara P. Crovitz
October 29, 2003
FOLEY & LARDNER
3000 K STREET, N.W.
WASHINGTON, DC 20007
WRITER'S DIRECT LINE
Douglas J. Scheidt, Esq.
Associate Director and Chief Counsel
Division of Investment Management
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.,
Mail Stop 0506
Washington, D.C. 20549
Re: In the Matter of Certain Analyst Conflicts of Interest,
File No. HO-9479 (U.S. Bancorp Piper Jaffray Inc.)
Dear Mr. Scheidt:
We submit this letter on behalf of our client, U.S. Bancorp Piper Jaffray Inc. ("Piper Jaffray"), in connection with a settlement agreement (the "Settlement") arising out of a joint investigation by the Securities and Exchange Commission (the "Commission"), the New York Stock Exchange, Inc. (the "NYSE"), NASD Regulation, Inc. (the "NASDR") and various state and territory regulatory agencies (the "States") into research analyst conflicts of interest at Piper Jaffray and several other large investment banking firms.
Piper Jaffray, a broker-dealer registered under Section 15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), seeks the assurance of the staff of the Division of Investment Management ("Staff") that it would not recommend any enforcement action to the Commission under Section 206(4) of the Advisers Act, or Rule 206(4)-3 thereunder (the "Rule"), if an investment adviser pays Piper Jaffray, or any of its associated persons, a cash payment for the solicitation of advisory clients, notwithstanding the existence of the Final Judgment (as defined below) and any related state or territory court injunction. While the Final Judgment in question does not operate to prohibit or suspend Piper Jaffray or any of its associated persons from acting as or being associated with an investment adviser and does not relate to solicitation activities on behalf of investment advisors, it may affect the ability of Piper Jaffray and its associated persons to receive such payments. The Staff in many other instances has granted no-action relief under the Rule in similar circumstances.
The Commission, the NYSE, the NASDR and the States are currently engaged in settlement discussions with Piper Jaffray in connection with a joint investigation into research analyst conflicts of interest at Piper Jaffray and several other large investment banking firms. As a result of these discussions, the Commission will file a complaint (the "Complaint") against Piper Jaffray in the United States District Court for the Southern District of New York (the "District Court") in a civil action captioned Securities and Exchange Commission v. U.S. Bancorp Piper Jaffray Inc.. Piper Jaffray will then execute a consent and undertaking (the "Consent") in which Piper Jaffray neither admits nor denies any of the allegations in the Complaint, except as to jurisdiction, but consents to the entry of a final judgment against Piper Jaffray by the District Court (the "Final Judgment"). The Final Judgment will, among other things, enjoin Piper Jaffray, directly or through its officers, directors, agents and employees, from violating Section 17(b) of the Securities Act of 1933, NASD Rules 2110, 2210 and 3010, and NYSE Rules 402, 476, 472, and 342. Additionally, the Final Judgment will order Piper Jaffray to make payments totaling $32,500,000 in settlement of the matters addressed in the Final Judgment, and to comply with the undertakings set forth in the Final Judgment.1
The Rule prohibits an investment adviser from paying a cash fee to any solicitor that has been temporarily or permanently enjoined by an order, judgment or decree of a court of competent jurisdiction from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security. Entry of the Final Judgment could cause Piper Jaffray to be disqualified under the Rule, and accordingly, absent no-action relief, Piper Jaffray may be unable to receive cash payments for the solicitation of advisory clients.2
In the release adopting the Rule, the Commission stated that it "would entertain, and be prepared to grant in appropriate circumstances, requests for permission to engage as a solicitor a person subject to a statutory bar."3 We respectfully submit that the circumstances present in this case are precisely the sort that warrant a grant of no-action relief.
The Rule's proposing and adopting releases explain the Commission's purpose in including the disqualification provisions in the Rule. The purpose was to prevent an investment adviser from hiring as a solicitor a person whom the adviser was not permitted to hire as an employee, thus doing indirectly what the adviser could not do directly. In the proposing release, the Commission stated that:
[b]ecause it would be inappropriate for an investment adviser to be permitted to employ indirectly, as a solicitor, someone whom it might not be able to hire as an employee, the Rule prohibits payment of a referral fee to someone who . . . has engaged in any of the conduct set forth in Section 203(e) of the [Advisers] Act . . . and therefore could be the subject of a Commission order barring or suspending the right of such person to be associated with an investment adviser.4
The Final Judgment does not bar, suspend, or limit the firm or any person currently associated with the firm from acting in any capacity under the federal securities laws. Piper Jaffray has not been sanctioned for activities relating to its activities as an investment adviser or its solicitation of advisory clients.5 Accordingly, consistent with the Commission's reasoning, there does not appear to be any reason to prohibit an adviser from paying Piper Jaffray or its associated persons for engaging in solicitation activities under the Rule.
The Staff previously has granted numerous requests for no-action relief from the disqualification provisions of the Rule to individuals and entities found by the Commission to have violated a wide range of federal securities laws and rules thereunder and SRO rules or permanently enjoined by courts of competent jurisdiction from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security.6
In connection with this request, Piper Jaffray undertakes:
1. to conduct any cash solicitation arrangement entered into with any investment adviser required to be registered under Section 203 of the Advisers Act in compliance with the terms of Rule 206(4)-3 except for the investment adviser's payment of cash solicitation fees to Piper Jaffray which is subject to the Final Judgment;
2. to comply with the terms of the Final Judgment, including, but not limited to, the payment of disgorgement, pre-judgment interest, civil or administrative penalties and fines; and
3. that for ten years from the date of the entry of the Final Judgment, Piper Jaffray or any investment adviser with which it has a solicitation arrangement subject to Rule 206(4)-3 will disclose the Final Judgment in a written document that is delivered to each person whom Piper Jaffray solicits (a) not less than 48 hours before the person enters into a written or oral investment advisory contract with the investment adviser or (b) at the time the person enters into such a contract, if the person has the right to terminate such contract without penalty within 5 business days after entering into the contract.
We respectfully request the Staff to advise us that it will not recommend enforcement action to the Commission if an investment adviser that is required to be registered with the Commission pays Piper Jaffray, or any of its associated persons, a cash payment for the solicitation of advisory clients, notwithstanding the Final Judgment and any related state or territory injunction.
Please do not hesitate to contact the undersigned at 202-672-5354 or Dean Jeske at 312-832-4564 regarding this request.
Joseph D. Edmondson, Jr.
James L. Chosy, Esq.
Steven Lentz, Esq.
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