Investment Advisers Act of 1940
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
IM Ref. No. 2003428910
DIVISION OF INVESTMENT MANAGEMENT
File No. 8-22651
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 UBS Securities LLC f/k/a UBS Warburg LLC ("UBS Securities"), a registered broker-dealer, or any of UBS Securities' 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 UBS Securities a solicitation fee.2
Our position is based on the facts and representations in your incoming letter dated September 26, 2003, particularly UBS Securities' 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 UBS Securities or any of its associated persons.
Sara P. Crovitz
September 26, 2003
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 5-6
Washington, D.C. 20549-0506
Re: In re Certain Analyst Conflicts of Interest / HO-09479
Dear Mr. Scheidt:
We submit this letter on behalf of our client, UBS Securities LLC (formerly known as UBS Warburg LLC) ("UBS Securities"), 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. ("NYSE"), NASD, Inc. ("NASD") and various state and territory regulatory agencies (the "States") into research analyst conflicts of interest at UBS Securities and several other large investment banking firms.
UBS Securities, a broker-dealer registered under Section 15 of the Securities Exchange Act of 1934, as amended (the Exchange Act"), seeks the assurance of the staff of the Division of Investment Management (the "Staff") that it would not recommend any enforcement action to the Commission under Section 206(4) of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), or Rule 206(4)-3 thereunder (the "Rule"), if an investment adviser pays UBS Securities, 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) or any related state or territory court injunction. While the Final Judgment does not operate to prohibit or suspend UBS Securities 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 UBS Securities 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, NYSE, NASD and the States have concluded settlement discussions with UBS Securities in connection with a joint investigation into research analyst conflicts of interest at UBS Securities and several other large investment banking firms. As a result of these discussions, the Commission filed a complaint (the "Complaint") on April 28, 2003 against UBS Securities 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. UBS Warburg LLC. UBS Securities has executed a consent and undertaking (the "Consent") in which it neither admits nor denies any of the allegations in the Complaint, except as to jurisdiction, but has consented to the entry of a final judgment by the District Court (the "Final Judgment"). The Final Judgment, among other things, will enjoin UBS Securities, directly or through its officers, directors, agents and employees, from violating Section 17(b) of the Securities Act, Rules 342, 401, 472 and 476(a)(6) of the NYSE, and Conduct Rules 2110, 2210 and 3010 of the NASD.1 Additionally, the Final Judgment will order UBS Securities to make payments aggregating up to $80 million in resolution of the matters addressed in the Final Judgment, and to comply with the undertakings set forth in the Final Judgment.2
Rule 206(4)-3 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. Because the Final Judgment may be deemed an injunction of the type referred to in the Rule, UBS Securities and its associated persons could, absent no-action relief, be disqualified under the Rule from receiving cash payments from a registered investment adviser for the solicitation of advisory clients.3
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."4 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.5
The Final Judgment does not bar, suspend, or limit UBS Securities or any person associated with UBS Securities from acting in any capacity under the federal securities laws. In addition, the Final Judgment does not sanction UBS Securities or its associated persons for conduct relating to activities as an investment adviser or the solicitation of advisory clients.6 Accordingly, consistent with the Commission's reasoning, there does not appear to be any reason to prohibit an adviser from paying UBS Securities 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 or SRO rules, or that have been 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.7
In connection with this request, UBS Securities 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 UBS Securities, 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, UBS Securities 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 UBS Securities 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 UBS Securities or any of its associated persons a cash payment for the solicitation of advisory clients, notwithstanding the Final Judgment or any related state or territory court injunction.
Please do not hesitate to call the undersigned at (212) 225-2760 regarding this request.
Mitchell A. Lowenthal
cc: Robert C. Dinerstein
UBS Securities LLC
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