Friday, 24 October 2003 08:00
Investment Advisers Act of 1940 – Rule 206(4)-3
October 24, 2003
|RESPONSE OF THE OFFICE OF CHIEF COUNSEL||Our Ref. No. 200385177 Mr. James DeYoung|
|DIVISION OF INVESTMENT MANAGEMENT||File No. 132-3|
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 Mr. James DeYoung a cash fee for the solicitation of advisory clients in accordance with Rule 206(4)-3,1 notwithstanding the existence of a Final Judgment of Permanent Injunction from the U.S. District Court for the District of Columbia (“Order”), which would otherwise preclude such an investment adviser from paying Mr. DeYoung a solicitation fee.2 Our position is based on the facts and representations in your letter dated September 12, 2003, particularly your representations that:
- Mr. DeYoung will 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 Mr. DeYoung, who is subject to the Order;3
- Mr. DeYoung is not barred or suspended by the Order from acting in any capacity under the federal securities laws; and
- Mr. DeYoung has complied with the terms of the Order, including, but not limited to, the payment of disgorgement, pre-judgment interest, civil or administrative penalties and fines.4
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 Mr. DeYoung. Eric S. Purple Senior Counsel
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 the solicitor is a person that is subject to the disqualifications that are listed in the rule. 2 SEC v. DeYoung, No. 83-2234 (D.D.C. filed Aug. 3, 1983). 3 Telephone conversation on October 24, 2003 between Eric S. Purple of the staff and Richard T. Choi of Foley & Lardner. 4 Id.
September 12, 2003 FOLEY & LARDNER WASHINGTON HARBOUR 3000 K STREET, N.W., SUITE 500 WASHINGTON, D.C. 20007-5143 202.672.5300 TEL 202.672.5399 FAX www.foleylardner.com WRITER’S DIRECT LINE 202.295.4005 [email protected] EMAIL CLIENT/MATTER NUMBER 034649-0101 Douglas J. Scheidt, Esq. Associate Director and Chief Counsel Division of Investment Management Securities and Exchange Commission Mail Stop 05-06 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Mr. James DeYoung Dear Mr. Scheidt: Our client, Mr. James DeYoung (“Mr. DeYoung”), seeks assurance that the staff of the Division of Investment Management (the “Staff”) will not recommend enforcement action to the Securities and Exchange Commission (the “Commission”) under Section 206(4) of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), or Rule 206(4)-3 (the “Rule”) thereunder, if an investment adviser required to be registered under the Advisers Act pays, and Mr. DeYoung receives, cash payments for the solicitation of advisory clients, notwithstanding a potentially disqualifying event described below. In support of this request, we note that the Staff has granted no-action relief under the Rule to other requestors in similar circumstances, as discussed below. Please be advised that Mr. DeYoung is not currently engaged in any solicitation arrangements that would be subject to the Rule. Mr. DeYoung seeks the requested relief so that he may act as a solicitor in the future.
Mr. DeYoung is the founder and a principal of Winston Partners Incorporated (“Winston Partners”), which provides strategic corporate advisory and investor relations services to a select group of private and publicly-owned companies. Since its inception in 1984, Winston Partners has focused on assisting clients in managing relationships with key constituencies, such as securities analysts and investors, financial media, boards of directors and employees as well as the general public. In addition, Mr. DeYoung is a general partner of Resource Ventures L.P., a venture fund that invests in promising businesses that rely on technology and the Internet. Mr. DeYoung is seeking the ability to engage in solicitation of advisory clients, because he believes it would be beneficial to his businesses.
EVENTS AT ISSUE
In August 1983, the Commission filed a complaint (“Complaint”) in federal district court alleging that Mr. DeYoung violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder in connection with the purchase of 3,800 shares (“Shares”) of the common stock of Medcom, Inc. (“Medcom”). The Complaint alleged that Mr. DeYoung purchased the Shares while in possession of material non-public information concerning a proposed acquisition of Medcom by a subsidiary of Baxter Travenol Laboratories, Inc. (“Baxter”). The Complaint alleged that Mr. DeYoung misappropriated material non-public information for his own use and benefit during the course of his employment as Director of Corporate Communications and Financial Relations of Travenol Laboratories, Inc., the principal operating subsidiary of Baxter. The Complaint alleged that Mr. DeYoung’s total profits from the transactions in Medcom common stock were $51,464.1 On August 3, 1983, without admitting or denying the allegations in the Complaint, Mr. DeYoung consented to the entry of a Final Judgment of Permanent Injunction (“Order”) enjoining him from violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and ordering him to disgorge $51,464.2
Rule 206(4)-3(a)(1)(ii) prohibits, in part, an investment adviser from paying a cash fee, directly or indirectly, to any solicitor who has been found by the Commission to have engaged in any conduct specified in paragraphs (1), (5) or (6) of Section 203(e) of the Advisers Act, or who is subject to an order, judgment or decree described in Section 203(e)(4) of the Advisers Act. Because the Order is an order of the type described in Section 203(e)(4) of the Advisers Act, Mr. DeYoung could be disqualified from receiving cash payments for the solicitation of advisory clients. In addition, because the Order is not a Commission order, Mr. DeYoung cannot rely on the Staff’s no-action letters, dated March 26 and July 3, 2003, to Dougherty & Company LLC (the “Dougherty Letters”).
As noted in prior no-action requests, the Commission’s intention in adopting paragraph (a) of the Rule was to prevent an investment adviser from hiring as a solicitor a person who could not be hired as an employee, thus doing indirectly what it could not do directly.3 In the Proposing Release, the Commission stated that “because 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¬Öhas engaged in any of the conduct set forth in Section 203(e) of the [Advisers] Act¬Öand 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 In the Adopting Release, the Commission stated that “a finding that a person has engaged in conduct specified in [Section 203(e) of the Advisers Act] only authorizes and does not require the Commission to bar such person 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 For the following reasons, we respectfully submit that the Staff should grant the relief requested so that Mr. DeYoung may receive cash compensation for solicitation activities. First, the solicitation arrangements would be conducted in compliance with the terms of Rule 206(4)-3 except for the existence of the Order. Second, the Order does not bar Mr. DeYoung from acting in any capacity under the federal securities laws. Third, Mr. DeYoung has complied fully with the terms of the Order. Fourth, we believe that disqualifying Mr. DeYoung under the circumstances would be unduly and disproportionately severe considering (1) the event at issue in the Order occurred over 20 years ago, (2) the event at issue did not relate to solicitation activities, and (3) engaging in solicitation activities would complement Mr. DeYoung’s consulting business. In support of our request, we note that the Staff has previously granted no-action relief to others under similar circumstances.6 Further, although Mr. DeYoung cannot rely on the Dougherty Letters because the Order is not a Commission order, we note the Staff has granted no-action relief to others where the disqualifying events were subject to non-Commission orders.7 Finally, we note that Mr. DeYoung meets all other applicable conditions of the Dougherty Letters.8 For the foregoing reasons, we respectfully submit that permitting Mr. DeYoung to engage in solicitation activities would be consistent with the public interest, with the purpose of the Rule, and with the Commission’s policy of taking a flexible approach in applying the Rule’s disqualification provision.
In connection with this request, Mr. DeYoung undertakes:
- to conduct any solicitation arrangement entered into with any investment adviser required to be registered under Section 203 of the Advisers Act in compliance with all applicable provisions of the Rule; and
- to use his best efforts to ensure that any adviser with which he has a solicitation agreement describes the arrangement to the extent required in response to any applicable item of such adviser’s Form ADV.
For the reasons described above, we respectfully request that the Staff advise us that it will not recommend enforcement action to the Commission if an investment adviser required to be registered pursuant to Section 203 of the Advisers Act pays, and Mr. DeYoung receives, cash payments for solicitation of advisory clients notwithstanding the Order. Please contact me (202-295-4005) or my colleague Usha Sadagopan (312-832-4573) if you have any question or would like additional information. Very truly yours, /s/ Richard Choi Richard T. Choi
1 See SEC vs. James DeYoung, Litigation Release No. 10084, 28 S.E.C. Docket 606 (Aug. 4, 1983) 2 See SEC vs. James DeYoung, No. 83-2234 (D.D.C. Aug. 3, 1983) (order granting permanent injunction). 3 See Advisers Act Release No. 615 (Feb. 2, 1978) (“Proposing Release”); Advisers Act Release No. 688 (July 12, 1979) (“Adopting Release”). 4 Proposing Release at 5. 5 Adopting Release at n. 10. 6 See, e.g., The Dreyfus Corporation, SEC Staff No-Action Letter (Mar. 9, 2001) [hereinafter “Dreyfus”]; and Kidder Peabody and Company, Inc., SEC Staff No-Action Letter (Oct. 11, 1990) [hereinafter “Kidder”]. 7 See, e.g., Stephens Inc., SEC Staff No-Action Letter (Dec. 21, 2001); Salomon Brothers Inc., SEC Staff No-Action Letter (Jan. 26, 1994); and Kidder, supra note 6. 8 Because more than 20 years have passed since the entry of the Order, no disclosure thereof would be required in disclosure statements required by the Rule. We note that in prior no-action letters, the Staff has only required disclosure of disqualifying events for a ten year period following the formal disposition of the disqualifying events. See e.g., Dreyfus, supra note 6; Mitchell Hutchins Asset Management Inc., SEC Staff No-Action Letter (Jan. 2, 1998); Merrill Lynch, Pierce, Fenner & Smith, Inc., SEC Staff No-Action Letter (Aug. 7, 1997); and Interstate/Johnson Lane Corporation, SEC Staff No-Action Letter (Apr. 21, 1997). The Staff also has not required disclosure of disqualifying events when more than ten years have passed since the formal disposition of such events. See, e.g., J.B. Hanauer & Co., SEC Staff No-Action Letter (Apr. 27, 1999).