Investment Advisers Act of 1940 — Rule 206(4)-3
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
IM Ref. No. 20094211030
We would not recommend enforcement action to the United States Securities and Exchange Commission (“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, including an affiliated adviser of General Electric Company (“GE”), pays GE, as solicitor within the meaning of Rule 206(4)-3(d)(1), a cash solicitation fee, directly or indirectly, for the solicitation of advisory clients in accordance with Rule 206(4)-3,1 notwithstanding an injunctive order issued by the United States District Court for the District of Connecticut (the “Final Judgment”) that otherwise would preclude such an investment adviser from paying such a fee, directly or indirectly, to GE.2
Our position is based on the facts and representations in your letter dated August 11, 2009, particularly the representations of GE that:
(1) it will conduct any cash solicitation arrangement entered into with any investment adviser registered or 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, directly or indirectly, to GE, which is subject to the Final Judgment;
(2) the Final Judgment does not bar or suspend GE or any person currently associated with it from acting in any capacity under the federal securities laws;3
(3) it will comply with the terms of the Final Judgment; and
(4) for ten years from the date of the entry of the Final Judgment, GE 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 the GE 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.
This position applies only to the Final Judgment and not to any other basis for disqualification under Rule 206(4)-3 that may exist or arise with respect to GE.
Rochelle Kauffman Plesset
1 Rule 206(4)-3 prohibits any investment adviser that is required to be registered under the Advisers Act from paying a cash fee, directly or indirectly, to any solicitor with respect to solicitation activities if, among other things, the solicitor is subject to an order, judgment or decree described in Section 203(e)(4) of the Advisers Act.
2 Securities and Exchange Commission v. General Electric Company, No. 3:09-CV-01235-RNC (D. Conn.)(Aug. 11, 2009).
3 Section 9(a)(2) of the Investment Company Act of 1940 (the “Investment Company Act”) provides, in pertinent part, that a person may not serve or act as, among other things, an investment adviser or depositor of any investment company registered under the Investment Company Act or a principal underwriter for any registered open-end investment company or registered unit investment trust if, among other things, that person, by reason of any misconduct, is permanently or temporarily enjoined from acting, among other things, as an underwriter, broker, dealer or investment adviser, or from engaging in or continuing any conduct or practice in connection with any such activity, or in connection with the purchase or sale of any security. Section 9(a)(3) extends the prohibition to any company any affiliated person of which is disqualified pursuant to Section 9(a)(2).
You note that while, as of the date of this letter, GE does not act in any of the capacities set forth in Section 9(a) of the Investment Company Act, companies of which GE is an affiliated person do act in such capacities. The entry of the Final Judgment, absent the issuance of an order by the Commission pursuant to Section 9(c) of the Investment Company Act that exempts GE from the provisions of Section 9(a) of the Investment Company Act, would effectively prohibit GE and companies of which it is an affiliated person from acting in any of the capacities set forth in Section 9(a) of the Investment Company Act. You state that, pursuant to Section 9(c) of the Investment Company Act, certain affiliated persons of GE, on behalf of themselves and GE’s future affiliated persons, submitted an application to the Commission requesting (i) an order of temporary exemption from Section 9(a) of the Investment Company Act and (ii) a permanent order exempting such persons from the provisions of Section 9(a) of the Investment Company Act.
On August 11, 2009, the Commission issued an order granting certain affiliated persons of GE and GE’s future affiliated persons a temporary exemption from Section 9(a) of the Investment Company Act pursuant to Section 9(c) of the Investment Company Act, with respect to the Final Judgment, until the date the Commission takes final action on the application for a permanent order. In re GE Asset Management Incorporated, et al., SEC Rel. No. IC-28845 (Aug. 11, 2009). Therefore, such persons are not currently barred or suspended from acting in any capacity specified in Section 9(a) of the Investment Company Act as a result of the Final Judgment.
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