Investment Advisers Act of 1940 - Rule 206-4(3)
Royal Bank of Canada
December 19, 2014
Response of the Chief Counsel's Office
Division Of Investment Management
IM Ref. No. 20141029168
File No. 801-55108
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 pays to Royal Bank of Canada. ("RBC"), or any of its associated persons, as defined in Section 202(a)(17) of the Advisers Act, a cash solicitation fee, directly or indirectly, for the solicitation of advisory clients in accordance with Rule 206(4)-3,1 notwithstanding a consent order issued by the United States District Court for the Southern District of New York (the "Consent Order") that otherwise would preclude such an investment adviser from paying such a fee, directly or indirectly, to RBC.2
Our position is based on the facts and representations in your letter dated December 19, 2014, particularly the representations of RBC that:
- 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, as if RBC was not a disqualified person for purposes of Rule 206(4)-3 by virtue of the Consent Order;
- the Consent Order does not bar or suspend RBC or any person currently associated with RBC from acting in any capacity under the federal securities laws;3
- it will comply with the terms of the Consent Order, including, but not limited to, the payment of the civil penalty; and
- for ten years from the date of the entry of the Consent Order, RBC or any investment adviser with which it has a solicitation arrangement subject to Rule 206(4)-3 will disclose the Consent Order in a written document that is delivered to each person whom RBC 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 Consent Order and not to any other basis for disqualification under Rule 206(4)-3 that may exist or arise with respect to RBC or any of its associated persons.
Laura L. Solomon
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 that is described in Section 203(e)(4) of the Advisers Act.
2 CFTC v. Royal Bank of Canada, 12-cv-2497, Dkt. No. 124 (S.D.N.Y. Dec. 18, 2014).
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).
The entry of the Consent Order, absent the issuance of an order by the Commission pursuant to Section 9(c) of the Investment Company Act that exempts RBC from the provisions of Section 9(a) of the Investment Company Act, would effectively prohibit RBC 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, RBC and certain affiliated persons, on behalf of themselves and 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 December 19, 2014, the Commission issued an order granting RBC, certain affiliated persons and 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 Consent Order, until the date the Commission takes final action on the application for a permanent order. In re RBC; SEC Rel. No. IC-31388 (December 19, 2014). Therefore, RBC, certain affiliated persons and future affiliated 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 Consent Order.
The Incoming Letter is in Acrobat format.