Dougherty & Company LLC: No-Action Letter dated March 21, 2003

Effective November 4, 2022, This Letter is Withdrawn.
Please consult the following web page for more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements.

No-Action Letter under
Investment Advisers Act of 1940 —
Section 206 and Rule 206(4)-3

Dougherty & Company LLC

Response of the Office of Chief Counsel
Division of Investment Management
IM Ref. No. 20033211327
File No. 008-21937

Your letter dated May 28, 2002 requests our assurance that 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 ("investment adviser") pays Dougherty & Company LLC ("Dougherty"), a broker-dealer registered with the Commission, or any of Dougherty's associated persons, a cash fee, directly or indirectly, for the solicitation of advisory clients in accordance with Rule 206(4)-3, notwithstanding two Commission administrative orders (the "Dougherty Orders") that otherwise would preclude such an investment adviser from paying Dougherty a solicitation fee.¹ Under the circumstances set forth below, we would not recommend enforcement action to the Commission if any investment adviser that is required to be registered pays Dougherty for the solicitation of advisory clients, notwithstanding the Dougherty Orders.²

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: (a) is subject to a Commission order issued under Section 203(f) of the Advisers Act; (b) has been convicted within the previous ten years of any felony or misdemeanor involving conduct described in Section 203(e)(2)(A) through (D) of the Advisers Act; (c) has been found by the Commission to have engaged, or has been convicted of engaging, in any of the conduct specified in paragraphs (1), (5) or (6) of Section 203(e) of the Advisers Act; or (d) is subject to an order, judgment or decree described in Section 203(e)(4) of the Advisers Act.³

On numerous occasions, we have agreed not to recommend enforcement action to the Commission under Section 206(4) of the Advisers Act and Rule 206(4)-3 against certain investment advisers that proposed to pay cash solicitation fees to certain solicitors who: (a) were subject to a Commission order issued under Section 203(f) of the Advisers Act; (b) had been convicted within the previous ten years of any felony or misdemeanor involving conduct described in Section 203(e)(2)(A) through (D) of the Advisers Act; (c) had been found by the Commission to have engaged, or who had been convicted of engaging, in any of the conduct specified in paragraphs (1), (5) or (6) of Section 203(e) of the Advisers Act; or (d) were subject to an order, judgment or decree described in Section 203(e)(4) of the Advisers Act. In evaluating such requests, we have been mindful of the Commission's intent, as expressed in the proposing and adopting releases for Rule 206(4)-3, to prohibit persons who themselves are prohibited from acting as, or being associated with, an investment adviser from circumventing those restrictions by acting as a cash solicitor for an investment adviser.⁴ Accordingly, we have agreed not to recommend enforcement action to the Commission only if, among other things, the solicitors were not barred or suspended from acting as, or being associated with, an investment adviser.⁵

Thus far, we have addressed requests for no-action relief under Section 206(4) and Rule 206(4)-3 on a case-by-case basis. Based on our experience, we believe that such treatment is no longer necessary for certain cash solicitation arrangements. In essence, we believe that no-action relief under Section 206(4) and Rule 206(4)-3 generally is appropriate, under the circumstances set forth below, for any investment adviser that is proposing to pay a solicitor cash solicitation fees when the Commission has sanctioned the solicitor but has not barred or suspended the solicitor from acting in any capacity under the federal securities laws.

Accordingly, having stated our views previously, we agree that we would not recommend enforcement action to the Commission under Section 206(4) and Rule 206(4)-3 if an investment adviser pays cash solicitation fees to a solicitor who is subject to an order issued by the Commission under Section 203(f) of the Advisers Act, or who is subject to an order issued by the Commission in which the Commission has found that the solicitor: (a) has been convicted of any felony or misdemeanor involving conduct described in Section 203(e)(2)(A) through (D) of the Advisers Act; (b) has engaged, or has been convicted of engaging, in any of the conduct specified in paragraphs (1), (5) or (6) of Section 203(e) of the Advisers Act; or (c) was subject to an order, judgment or decree described in Section 203(e)(4) of the Advisers Act (for purposes of this letter, such Commission orders are collectively referred to as "Rule 206(4)-3 Disqualifying Orders"), provided that:

(1) the cash solicitation arrangement is conducted in compliance with the terms of Rule 206(4)-3 except for the investment adviser's payment of cash solicitation fees to a solicitor who is subject to a Rule 206(4)-3 Disqualifying Order;

(2) no Rule 206(4)-3 Disqualifying Order bars or suspends the solicitor from acting in any capacity under the federal securities laws;

(3) the solicitor has complied with the terms of each Rule 206(4)-3 Disqualifying Order, including, but not limited to, the payment of disgorgement, pre-judgment interest, civil or administrative penalties and fines; and

(4) for a period of ten years following the date of each Rule 206(4)-3 Disqualifying Order, the solicitor discloses the order to each person whom the solicitor solicits in the separate written disclosure document required to be delivered to such person under Rule 206(4)-3(a)(2)(iii)(A) or, if the solicitor is a person specified in Rule 206(4)-3(a)(2)(i) or (ii), the solicitor discloses the order to each person whom the solicitor solicits by providing the person at the time of the solicitation with a separate written disclosure document that discusses the terms of the order.⁶

Thus, unless they present novel or unusual issues, we no longer will respond to requests for no-action relief under Section 206(4) and Rule 206(4)-3 with respect to any cash solicitation arrangement under which an investment adviser proposes to pay cash solicitation fees to a solicitor subject to a Rule 206(4)-3 Disqualifying Order under the foregoing circumstances. We, however, will continue to consider on a case-by-case basis requests for no-action relief under Section 206(4) and Rule 206(4)-3 with respect to any cash solicitation arrangement that is proposed to be conducted in a different manner. We also will continue to consider on a case-by-case basis any requests for no-action relief with respect to any cash solicitation arrangement involving a solicitor who has been convicted within the previous ten years of any felony or misdemeanor involving conduct described in Section 203(e)(2)(A) through (D) of the Advisers Act, or who is subject to an order, judgment or decree described in Section 203(e)(4) of the Advisers Act, but who is not subject to a Rule 206(4)-3 Disqualifying Order relating to such conviction or order, judgment or decree

Endnotes

¹ In the Matter of Dougherty Summit Securities LLC, Admin. Proc. File No. 3-9929, Securities Exchange Act of 1934 Rel. No. 41584 (Jun. 30, 1999). In the Matter of Summit Investment Corporation, et al., Admin. Proc. File No. 3-8121, Securities Exchange Act of 1934 Rel. No. 32773 (Aug. 19, 1993). You represent that Summit Investment Corporation changed its name to Dougherty Summit Securities and then changed it to Dougherty & Company LLC.

² This letter confirms the position that we expressed to you orally on August 1, 2002.

⁴ Advisers Act Rel. No. 615 (Feb. 2, 1978) (proposing release) ("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....") and Advisers Act Rel. No. 688 (July 12, 1979) (adopting release).

⁵ See, e.g., The Dreyfus Corporation (pub. avail. Mar. 9, 2001) (no-action request letter includes a partial list of relevant no-action letters).

⁶ See Ramius Capital Management (pub. avail. Apr. 5, 1996) (no-action relief based, in part, on solicitors' representation that they would disclose to all persons solicited under the arrangement that they were subject to the relevant Commission order for a period of ten years following the date of the order). See also Prudential Securities Incorporated (Feb. 7, 2001) (no-action relief based, in part, on cash solicitor's representation that it would discuss the relevant Commission order in the separate written disclosure document that the solicitor is required to provide under Rule 206(4)-3(b) for a period of ten years following the date of the order).

The position that we take in this letter applies only to the extent that the solicitor discloses the terms of any order to which it is subject, as stated above. We will consider, on a case-by-case basis, any requests not to make such disclosure.

Incoming Letter:

Thomas J. Abood
Secretary; General Counsel
(612) 376-4118 Fax (612) 204-8020
tabood@dfgmail.com

Douglas J. Scheidt, Esq.
Associate Director and Chief Counsel
Division of Investment Management
Mail Stop 0506
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Request for Relief by Dougherty & Company LLC Under the Investment Advisers Act of 1940 Rule 206(4)-3

Dougherty & Company LLC ("D&Co.") seeks the assurance of the staff of the Division of Investment Management (the "Staff") that it will not recommend enforcement action if D&Co. and its "associated persons," as defined in Section 202(a)(17) of the Investment Advisers Act of 1940 ("Advisers Act"), receive cash payments for the solicitation of advisory clients from federally registered investment advisers, notwithstanding certain potentially disqualifying events under Rule 206(4)-3 under the Advisers Act (the "Rule") described below. These events do not operate to prohibit or suspend D&Co. from acting as, or being associated with, an investment adviser and do not relate to the solicitation of advisory clients. D&Co. notes in support of this request that the Staff has granted no-action relief to individuals and entities under the Rule in numerous similar circumstances.

Background

D&Co. is an investment banking and financial services firm organized under the laws of the State of Delaware. D&Co. is registered with the State of Minnesota as an investment adviser and with the Securities and Exchange Commission ("Commission") as a broker-dealer under the Securities Exchange Act of 1934 (the "Exchange Act").

Events at Issue

In June 1999, D&Co. entered into a settlement with the Commission resolving a Commission investigation into the firm's role in a refunding of a municipal securities offering by a retirement home issuer. As a condition of the settlement and without admission or denial by D&Co., D&Co. consented to an Order Instituting Proceedings, Making Findings and Imposing Remedial Sanctions (the "1999 Order").¹ In the 1999 Order, the Commission found D&Co. responsible for violations of Sections 15B(c)(1) of the Exchange Act and Rule G-17 adopted by the Municipal Securities Rulemaking Board (the "MSRB"). D&Co. neither admitted nor denied the Commission's findings in the 1999 Order. The Commission ordered D&Co. to: (i) cease and desist from committing or causing any future violation of Sections 15B(c)(1) of the Exchange Act and MSRB Rule G-17; (ii) disgorge its remarketing fee from the transaction; and (iii) pay a civil penalty in the amount of $400,000.

In August 1993, a predecessor of D&Co. named Summit Investment Corporation ("Summit") entered into a settlement with the Commission resolving an inquiry into Summit's supervision of a registered representative. Without admitting or denying the Commission's findings, Summit consented to an Order Instituting Public Proceedings, Making Findings and Imposing Remedial Sanctions (the "1993 Order;" together with the 1999 Order, the "Orders"):² (i) censuring Summit for its failure to supervise a registered representative and (ii) requiring Summit to retain the services and implement the recommendations of a Consultant regarding its supervisory procedures.

Effect of the Orders under Rule 206(4)-3.

The Rule prohibits a registered 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 of the conduct specified in paragraphs (1), (5) or (6) of Section 203(e) of the Advisers Act. Because the Orders find that D&Co. engaged in conduct specified in such paragraphs of that Section, the Commission could take the position that, for purposes of the Rule, D&Co. has engaged in conduct that would disqualify it from receiving cash payments for the solicitation of advisory clients. D&Co. has one outstanding solicitation arrangement and has suspended acceptance of payment with respect to this arrangement pending receipt of the relief requested in this application. D&Co. also seeks the requested relief so that D&Co. may act as a solicitor in the future.

Discussion

Based on the following, D&Co. respectfully requests that the Staff grant relief to D&Co. and its associated persons to engage in solicitation activities. First, the actions described above have not barred or suspended D&Co. or its associated persons from acting as an investment adviser or from associating with a registered investment adviser, and the conduct at issue was not related to the solicitation of advisory clients. D&Co. conducts its own investment advisory business without any limitations; it would therefore be illogical to prohibit D&Co. from receiving cash fees as a solicitor from unaffiliated investment advisers. Second, disqualifying D&Co. and its associated persons from receiving cash fees for the solicitation of advisory clients would be unduly and disproportionately severe, considering that the events at issue in the Orders occurred many years ago and do not relate to solicitation activities. Finally, D&Co. submits that permitting D&Co. and its associated persons to engage in solicitation activities would be consistent with the public interest, with the purpose of the Rule, and with the Commission's stated policy of taking a flexible approach in applying the Rule's disqualification provision.

D&Co. submits, therefore, that no reason exists to prohibit D&Co., or its associated persons, from receiving cash fees as a solicitor. In support of this request, D&Co. notes that the Staff has previously granted no-action relief to others under the Rule under similar circumstances. See, e.g., Stephens Inc. SEC No-Action Letter (December 21, 2001), The Dreyfus Corporation, SEC No-Action Letter (Mar. 9, 2001); Prudential Securities Inc., SEC No-Action Letter (Feb. 7, 2001); Tucker Anthony, Inc., SEC No-Action Letter (Dec. 21, 2000); J.B. Hanauer & Co., SEC No-Action Letter (Dec. 12, 2000); E-Invest, Inc., SEC No-Action Letter (Sept. 22, 2000); Credit Suisse First Boston Corp., SEC No-Action Letter (Aug. 24, 2000); Aeltus Investment Management, Inc., SEC No-Action Letter (July 17, 2000); William R. Hough & Co., SEC No-Action Letter (April 13, 2000); BT Alex. Brown Inc., SEC No-Action Letter (Nov. 17, 1999); NationsBanc Investments, Inc., SEC No-Action Letter (May 6, 1998); Morgan Keegan & Co., Inc., SEC No-Action Letter (Jan. 9, 1998); Merrill Lynch, Pierce, Fenner & Smith, Inc., SEC No-Action Letter (Aug. 7, 1997); Lehman Brothers, Inc., SEC No-Action Letter (Nov. 12, 1996); Salomon Brothers Inc., SEC No-Action Letter (Jan. 26, 1994); Kidder, Peabody & Co. Inc., (Mar. 30, 1992); First City Capital Corp., SEC No-Action Letter (Feb. 9, 1990).

Undertakings

(i) 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;

(ii) to use its best efforts to ensure that any adviser with which it has a solicitation agreement describes such arrangement to the extent required in response to any applicable item of such adviser's Form ADV; and

(iii) to discuss the above-described actions in any separate written disclosure document required to be delivered by D&Co. under the Rule, for a period of ten years from the date of each respective action.

Conclusion

For all of the reasons described above, D&Co. respectfully requests the Staff to advise it that it will not recommend enforcement action to the Commission if D&Co., or any of its associated persons, receives cash payments for the solicitation of advisory clients from an investment adviser that is required to be registered pursuant to Section 203 of the Advisers Act.

Please call me at (612) 376-4118 if you have questions regarding this application.

No-Action Letter under Investment Advisers Act of 1940 — Section 206 and Rule 206(4)-3