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U.S. Securities and Exchange Commission

No-Action Letter under:
Investment Advisors Act -
Section 206(4); Rule 206(4)(3)

Prudential Securities Inc.

February 7, 2001

RESPONSE OF
THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT

  Our Ref. No. 2001221137
Prudential Securities Incorporated
File No. 8-27154

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 Prudential Securities Incorporated, a registered broker-dealer ("PSI"), or any of its associated persons, a cash fee, directly or indirectly, for the solicitation of advisory clients in accordance with Rule 206(4)-3,1 notwithstanding a Commission administrative order (the "Order") that otherwise would preclude such an investment adviser from paying PSI a solicitation fee.2

Our position is based on the facts and representations in your letter dated February 2, 2001, particularly your representations that PSI will: (1) conduct any solicitation arrangement entered into with any investment adviser that is required to be registered under the Advisers Act in compliance with all of the applicable provisions of Rule 206(4)-3; (2) use its best efforts to ensure that any adviser with which it has a solicitation arrangement describes such arrangement to the extent required in response to Item 13 of Part II of the adviser's Form ADV; and (3) for ten years from the date of the entry of the Order, discuss the Order in the separate written disclosure document that PSI is required to deliver under the Rule. This position applies only to the Order and not to any other basis for disqualification under Rule 206(4)-3 that may exist or arise with respect to PSI or any of its associated persons.

Susan M. Olson
Senior Counsel

 

Endnotes

1 Rule 206(4)-3 under the Advisers Act 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 has been found by the Commission to have engaged, or has been convicted of engaging, in any of the conduct specified in Sections 203(e)(1), (5), or (6) of the Advisers Act.
2 In the Matter of Prudential Securities Incorporated, Admin. Proc. File No. 3-10413, Securities Act Rel. No.7945, Exchange Act Rel. No. 43896 (Jan. 29, 2001).

 


Incoming Letter

February 2, 2001

CONFIDENTIAL PURSUANT
TO 17 C.F.R. § 200.83

BY HAND

Douglas J. Scheidt, Esquire
Associate Director and Chief Counsel
Division of Investment Management
U.S. Securities and Exchange Commission
450 Fifth Street, N.W., Room 5007, Mail Stop 5-6
Washington, DC 20549

Re: In the Matter of Prudential Securities Incorporated, Administrative Proceeding
File No. 3-10413

Dear Mr. Scheidt:

This letter is submitted on behalf of Prudential Securities Incorporated (hereinafter referred to as "PSI"), a settling respondent in the above-captioned Administrative Proceeding. PSI, a registered broker-dealer, seeks the concurrence of the staff of the Division of Investment Management (the "Staff") that PSI, and associated persons, should not be prohibited by Section 206(4) of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and Rule 206(4)-3 thereunder (the "Rule") from receiving cash payments for the solicitation of advisory clients for registered investment advisers notwithstanding the disqualifying event associated with PSI described below. The event will not result in PSI being prohibited or suspended from acting as or being associated with an investment adviser and did not relate to the solicitation of advisory clients. Therefore, it should not disqualify PSI or any associated persons from receiving cash fees as solicitors. We note in support of this request that the Staff in other instances has granted no-action relief under the Advisers Act and the Rule for similar reasons.

BACKGROUND

PSI is registered with the Commission as a broker-dealer pursuant to Section 15(b) of the Exchange Act.

The staff of the Division of Enforcement engaged in settlement discussions with PSI in connection with the above-captioned Administrative Proceeding, brought pursuant to Sections 15(b), 19(h) and 21C of the Exchange Act of 1934 and Section 8A of the Securities Act of 1933. As a result of these discussions, PSI submitted an offer of settlement. In the offer of settlement, and solely for the purpose of the above-captioned proceeding and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, PSI consented to the entry of the Order1 without admitting or denying the matters set forth therein (other than those relating to the jurisdiction of the Commission).

Under the Order, the Commission made findings, without admission or denial by PSI, that in connection with a retail brokerage account opened by The Foundation For New Era Philanthropy ("New Era"), PSI violated Section 17(a) of the Exchange Act and Rule 17a-3 thereunder and failed to reasonably supervise a registered representative. Based on these findings, the Order requires that PSI cease and desist from committing or causing any violations of the above-mentioned provisions of the federal securities laws, and pay a civil penalty in the amount of Eight Hundred Thousand Dollars ($800,000).

EFFECT OF THE ORDER UNDER RULE 206(4)-3

Rule 206(4)-3(a)(1)(ii)(C) prohibits an investment adviser from paying a cash fee, directly or indirectly, to any solicitor that has been found by the Commission to have engaged in "conduct specified in paragraphs (1), (5), or (6) of section 203(e) of the [Advisers] Act." Because the Order finds that PSI engaged in conduct specified in paragraph (6) of that section, the Commission could take the position that, for purposes of the Rule, PSI should be deemed to have engaged in conduct that would disqualify it from receiving cash payments for the solicitation of advisory clients.

DISCUSSION

PSI and its associated persons hereby request that the Staff provide assurance that, notwithstanding the entry of the Order, it will not recommend enforcement action to the Commission under the Rule if any investment adviser that is required to be registered under the Advisers Act pays to PSI or associated persons a cash fee for the solicitation of advisory clients. The grounds for this request are as follows:

1. PSI's conduct addressed in the Order does not relate to any investment adviser solicitation activities.

2. The disqualification of PSI and associated persons from the receipt of cash fees for the solicitation of advisory clients would be unduly and disproportionately severe given that the Order relates to activity that occurred more than five years ago and is unrelated to the solicitation of advisory clients, and given the extent to which disqualification would affect the advisory client solicitation activities of PSI and any associated persons.

The intention of the Commission in adopting paragraph (a) of the Rule, as evidenced by the Rule's proposing2/ and adopting3/ releases, 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 Advisers Act Release No. 615, 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 disqualifying event described above does not bar, suspend, or limit PSI from acting as an investment adviser or from associating with a registered investment adviser, and the conduct addressed in the Order was not related to the solicitation of advisory clients. Accordingly, no reason exists to prohibit PSI, or associated persons, from receiving cash fees as a solicitor. The adopting release acknowledged the Commission's discretion in this regard, stating:

a finding that a person has engaged in the conduct specified in Section 203(e) [of the Advisers Act] only authorizes and does not require the Commission to bar such persons from being associated with a registered investment adviser. The Commission 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.5/

We respectfully submit that this is such a circumstance and that the granting of no-action relief would not be inconsistent with the public interest.

We note in support of this request that the Staff in other instances has granted no-action relief under the Rule for similar reasons. See, e.g., In the Matter of Certain Municipal Bond Refundings, SEC No-Action Letter (pub. avail. Apr. 13, 2000); Merrill Lynch, Pierce, Fenner & Smith, Inc., SEC No-Action Letter (pub. avail. Sep. 15, 1999); Bear, Stearns Securities Corp., SEC No-Action Letter (pub. avail. Aug. 5, 1999); J.B. Hanauer & Co., SEC No-Action Letter (pub. avail. Apr. 27, 1999); McDonald Investments Inc., SEC No-Action Letter (pub. avail. Apr. 2, 1999); In the Matter of Certain Market Making Activities on NASDAQ, SEC No-Action Letter (pub. avail. Jan. 11, 1999); PaineWebber Inc., SEC No-Action Letter (pub. avail. Dec. 22, 1998); NationsBanc Investments, Inc., SEC No-Action Letter (pub. avail. May 6, 1998); Morgan Keegan & Co., SEC No-Action Letter (pub. avail. Jan. 9, 1998); Merrill Lynch, Pierce, Fenner & Smith, Inc., SEC No-Action Letter (pub. avail. Aug. 7, 1997); Gruntal & Co., SEC No-Action Letter (pub. avail. July 17, 1996); Carnegie Asset Management, Inc., SEC No-Action Letter (pub. avail. July 11, 1994); Salomon Bros., SEC No-Action Letter (pub. avail. Jan. 26, 1994); Hickory Capital Management, Inc., SEC No-Action Letter (pub. avail. Feb. 11, 1993); Oppenheimer & Co., SEC No-Action Letter (pub. avail. June 5, 1992); Kidder, Peabody & Co., SEC No-Action Letter (pub. avail. Mar. 30, 1992); BT Securities Corp., SEC No-Action Letter (pub. avail. Mar. 30, 1992); Kidder, Peabody & Co., SEC No-Action Letter (pub. avail. Oct. 11, 1990); First City Capital Corp., SEC No-Action Letter (pub. avail. Feb. 9, 1990) RNC Capital Management Co., SEC No-Action Letter (pub. avail. Feb. 7, 1989); and Stein Roe & Farnham, Inc., SEC No-Action Letter (pub. avail. Aug. 25, 1988).

UNDERTAKINGS OF PSI

In connection with this request, PSI undertakes to:

1. conduct any solicitation arrangement entered into with any investment adviser that is required to be registered under the Advisers Act;

2. use its best efforts to ensure that any adviser with which it has a solicitation arrangement describes such arrangement to the extent required in response to Item 13 of such adviser's Part II of Form ADV; and

3. discuss the Order in the separate written disclosure document that PSI is required to deliver under the Rule for ten years from the date of the entry of the Order.

CONCLUSION

We respectfully request the Staff to advise us that it will not recommend enforcement action to the Commission if PSI or its associated persons receive cash payments for the solicitation of advisory clients for registered investment advisers, notwithstanding the Order.

Please do not hesitate to contact the undersigned at (202) 663-6613 regarding this request.

Sincerely,

Philip D. Anker

cc: A. Vasilescu, Esq.

 

Endnotes

1 In the Matter of Prudential Secs. Inc., Securities Act Rel. No. 7945, Exchange Act Rel. No. 43896 (Jan. 29, 2001).
2 Advisers Act Release No. 615, 14 S.E.C. Docket (CCH) 89 (Feb. 2, 1978).
3 Advisers Act Release No. 688, 17 S.E.C. Docket (CCH) 1293 (July 12, 1979).
4 14 S.E.C. Docket (CCH) 89, 91.
5 17 S.E.C. Docket (CCH) 1293, 1295 n.10.

 

http://www.sec.gov/divisions/investment/noaction/prudentialsecurities020701.htm


Modified: 10/31/2001