Other
Investment Advisers Act of 1940 – Section 206(4) / Rule 206(4)-3
March 21, 2019
March 21, 2019
RESPONSE OF THE CHIEF COUNSEL’S OFFICE
DIVISION OF INVESTMENT
We would not recommend enforcement action to the U.S. Securities and Exchange Commission (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”) directly or indirectly pays to Wells Fargo Securities, LLC (“WFS”), or any person through whom WFS directly or indirectly conducts its solicitation activities, a cash solicitation fee for the solicitation of advisory clients in accordance with Rule 206(4)-3,[1] notwithstanding the settlement of a civil injunctive action brought by the Commission against WFS (“Action”), in which a final judgment has been entered by the U.S. District Court for the District of Rhode Island (the “Final Judgment”) that otherwise would preclude an investment adviser from paying such a fee.[2]
Our position is based on the facts and representations in your letter dated March 21, 2019, particularly the representations of WFS that:
- it, directly or indirectly, 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 as if WFS were not a disqualified person for purposes of Rule 206(4)-3 by virtue of the Final Judgment;
- the Final Judgment does not bar, suspend, or limit WFS or any person currently associated with WFS from acting in any capacity under the federal securities laws; [3]
- it has complied, and will continue to comply, with the terms of the Final Judgment, including, but not limited to, the Injunction and the payment of the civil monetary penalty; and
- until ten (10) years from the date of the entry of the Final Judgment on March 20, 2019, WFS and any person through whom WFS directly or indirectly conducts its solicitation activities or any investment adviser with which it or any such person 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 WFS or such persons solicit (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 five business days after entering into the contract.
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 WFS.
Jessica Shin
Attorney-Adviser
[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, among other things, the solicitor is subject to an order, judgment or decree that is described in section 203(e)(4) of the Advisers Act.
[2] SEC v. Rhode Island Commerce Corporation, et al., Civil Action No. 1:16-cv-00107-M-PAS (D. R.I. March 20, 2019).
[3] Under section 9(a) of the Investment Company Act of 1940 (the “Investment Company Act”), as a result of the injunction (“Injunction”), WFS and certain affiliated persons of WFS were prohibited from serving or acting as, among other things, an investment adviser (including sub-adviser) or depositor to any registered investment company or as principal underwriter for any registered investment company or registered unit investment trust. Section 9(a)(2) of the Investment Company Act provides, in pertinent part, that a person may not serve or act as, among other things, an investment adviser or depositor of any investment company registered under the Investment Company Act or a principal underwriter for any registered open-end investment company or registered unit investment trust if, among other things, that person, by reason of any misconduct, is permanently or temporarily enjoined from acting, among other things, as an underwriter, broker, dealer, investment adviser or bank, or from engaging in or continuing any conduct or practice in connection with any such activity, or in connection with the purchase or sale of any security. Section 9(a)(3) extends the prohibition to any company any affiliated person of which is disqualified pursuant to section 9(a)(2). Furthermore, section 59 of the Investment Company Act makes applicable section 9 to business development companies as if they were registered closed-end companies. On March 20, 2019, the Commission issued an order granting WFS, and certain affiliated persons and future affiliated persons a temporary exemption from section 9(a) of the Investment Company Act pursuant to section 9(c) of the Investment Company Act, with respect to the Injunction, until the date the Commission takes final action on the application for a permanent order. In re Wells Fargo Securities, LLC, et al., SEC Rel. No. IC-33404 (March 20, 2019). Therefore, WFS, certain affiliated persons and future affiliated persons are not currently barred or suspended from acting in any capacity specified in section 9(a) of the Investment Company Act as a result of the Injunction.