Investment Advisers Act of 1940- Section 206(4) Rule 206(4)-3
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
Our Ref. No. 2004712169
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 Deutsche Bank Securities Inc. (the "Settling Firm"), a registered broker-dealer and investment adviser, or any of the Settling Firm'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 the Settling Firm a solicitation fee.2
Our position is based on the facts and representations in your letter dated September 23, 2004, particularly the Settling Firm's representations that:
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 the Settling Firm or any of its associated persons.
Eric S. Purple
The entry of the Final Judgment, absent the issuance of an order by the Commission pursuant to section 9(c) of the Company Act exempting the Settling Firm from section 9(a) of the Company Act, would prohibit the Settling Firm from, among other things, acting as an investment adviser to any registered investment company. You state that, pursuant to section 9(c) of the Company Act, the Settling Firm and certain affiliates submitted an application to the Commission requesting (i) an order of temporary exemption from section 9(a) of the Company Act and (ii) a permanent order exempting the Settling Firm and certain affiliates from the provisions of section 9(a) of the Company Act.
On September 24, 2004, the Commission issued an order granting the Settling Firm and certain affiliates a temporary exemption from section 9(a) of the Company Act pursuant to section 9(c) of the 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 Deutsche Investment Management Americas, Inc., et. al., SEC Rel. No. IC-26620 (Sept. 24, 2004) ("Release"). In the Release, the Commission also issued a notice of the application for a permanent order exempting the Settling Firm and certain affiliates from section 9(a) of the Company Act, indicating that an order granting the application would be issued unless the Commission orders a hearing. As a result, the Final Judgment does not bar or suspend the Settling Firm or any person currently associated with the Settling Firm from acting in any capacity under the federal securities laws.
September 23, 2004
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
Dear Mr. Scheidt:
We submit this letter on behalf of our client, Deutsche Bank Securities Inc. (Broker-Dealer # 2525 and Investment Adviser # 801-9638) ("DBSI"), 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") and the NASD Regulation, Inc. (the "NASDR") into research analyst conflicts of interest at DBSI and several other large investment banking firms.
DBSI, 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 DBSI, 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) of a court of competent jurisdiction as described below. While the Final Judgment in question does not operate to prohibit or suspend DBSI 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 advisers, it may affect the ability of DBSI 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 and the NASDR agreed in August 2004 to a settlement in connection with a joint investigation into research analyst conflicts of interest at DBSI and several other large investment banking firms. The Commission filed a complaint (the "Complaint") against DBSI 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. Deutsche Bank Securities, Inc. DBSI executed a consent and undertaking (the "Consent") in which DBSI neither admitted nor denied any of the allegations in the Complaint, except as to jurisdiction, but consented to the entry of a final judgment against DBSI by the District Court (the "Final Judgment"). The Final Judgment, among other things, will enjoin DBSI, directly or through its officers, directors, agents and employees, from violating Section 17(b) of the Securities Act of 1933 (the "Securities Act"), Section 17(b) of the Securities Exchange Act of 1934 ("Exchange Act"),1 NASD Rules 2110, 2210, and 3010 and NYSE Rules 342, 401, 472, and 476. Additionally, the Final Judgment will order DBSI to make payments of: (i) $50 million, which will be offset in the amount of $25 million that will be paid by DBSI pursuant to its agreements with state regulators in related proceedings; (ii) $25 million to fund the provision of independent research to investors; (iii) $5 million to promote investor education; and (iv) $7.5 million in connection with allegations concerning Section 17(b) of the Exchange Act.
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 DBSI to be disqualified under the Rule, and accordingly, absent no-action relief, DBSI may be unable to receive cash payments for the solicitation of advisory clients.
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."2 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.3
The Final Judgment does not bar, suspend, or limit DBSI or any person currently associated with DBSI from acting in any capacity under the federal securities laws.4 DBSI has not been sanctioned for 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 DBSI 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 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 and has granted requests for no-action relief to the other large investment banking firms that were the subject of the joint investigation into research analyst conflicts of interest.7
In connection with this request, DBSI undertakes:
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 DBSI, or any of its associated persons, a cash payment for the solicitation of advisory clients, notwithstanding the Final Judgment.
Please do not hesitate to call the undersigned at (212) 859-8558 regarding this request.
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