Category Archives: News and Commentary

Distressed debt hedge fund closes doors

3 Replies

I previously wrote an article about distressed debt hedge funds and the popularity of such funds as they try to get in for a deal. However, the considerable amount of media attention which has been focused on this sector of the market has spooked investors enough to get them moving on redemption day. FINaltenatives is reporting that a fairly large hedge fund managed by Turnberry Capital Management is completely closing its doors. It is at least somewhat surprising that a group this large (the fund reportedly ran up to $800 million at one point) would close its doors immediately instead of trying to wind the fund down over the course of a couple redemption dates.

A few reasons why they might want to wind down the fund over a period of time may include: (1) the fund offering documents did not include a hedge fund gate provision, (2) the manager no longer thought the fund’s strategy was viable with such a severely reduced asset base or (3) the manager thought that he could get the best prices on the assets if he sold them in a large bundle instead of piece meal over time. The article also stated the manager is planning to start a corporate bond fund, which is another reason the manager decided to wind the fund down immediately.

What is most interesting about this event is the disconnect between the strategies managers wish to pursue and the strategies that the investing masses are willing to (remain) invest(ed) in.

The article is at http://www.finalternatives.com/node/5251.

Hedge fund seeder invests in ABL hedge fund

Leave a reply

FinAlternatives, an news source for hedge funds and private equity funds, is reporting that FRM Capital Advisors, a London based hedge fund seeding firm, is making an investment in an asset-based lending (ABL) hedge fund. FRM reportedly made a $60 million investment into Victory Park Capital, a Chicago-based firm.

As I noted earlier in a story on ABL hedge funds, this a hot area for investments right now. The central advantages of an ABL hedge fund is that (1) they are not generally going to be correlated to the general equity markets and (2) most ABL hedge funds have a monthly or quarterly distribution component. This distribution of earnings can be particularly attractive to certain investors seeking current income and non-correlation to the bond and equity markets.

ABL funds are particularly attractive right now because the credit markets are drying up. Small and mid-market companies, which rely on short term financing to fund business operations, are being squeezed by lack of liquidity. Many small ABL companies and hedge funds are looking to fill this gap in the market. Many of these companies and funds have been quite successful.

Hedge Fund Seeder to Go Public

2 Replies

Two hedge fund groups, Tuckerbrook Alternative Investments and HARDT Group Advisors, are joining forces to create HT Capital Corporation, a hedge fund seeder/incubator which will seek to go public with a $300 million offering of it securities. The IPO will be underwritten by Jeffries and Company, will be listed on the NYSE, and go by the symbol “HTG.”

HT Capital Corporation plans to use approximately $200 million to seed/incubate an initial stable of 8 promising hedge fund managers. The company will then seed an additional 10 managers within the 12 months after the IPO with proceeds from the IPO as well as a credit facility. HT Capital Corp. will invest in emerging managers through senior loans to the management company and participating interest (equity) investments in the hedge fund management company. These two types of investments are expected to produce four different revenue streams:

1. an 8.5% quarterly cash interest payment on the senior loan

2. a share of the management company’s management fees (expected to grow as AUM grow)

3. a share of the management company’s performance allocation (with the potential for such performance allocation to increase as AUM grow)

4. a stake in any sale of the hedge fund management company

The company will invest in emerging hedge fund management companies; the below statement comes from their N-2 filing with the SEC:

We plan to diversify across the following three distinct stages of emerging management companies:

“Incubation-stage” management companies, which will generally have few or no assets under management at the time of our investment, but may have, for example, an investment manager who recently came from the trading desk of a larger firm or established an investment track record in another firm’s name. We generally expect to provide incubation-stage management companies with between $5 million and $10 million of senior loans and a participating interests investment of typically about $1 million.

“Early-stage” management companies, which will generally have an investment track record of between 6 months and 24 months and between $5 million and $25 million of assets under management at the time of our investment. We generally expect to provide early-stage management companies with between $10 million and $25 million of senior loans and a participating interests investment of typically between $1 million and $2 million.

Acceleration-stage” management companies, which will generally have an investment track record of between two and three years and between $25 million and $100 million of assets under management at the time of our investment. We generally expect to provide acceleration-stage management companies with between $25 million and $50 million of senior loans and a participating interests investment of typically between $1 million and $2 million.

Hedge fund incubation platforms are becoming more and more popular as reports indicate that small and emerging managers present larger investors with the greatest opportunity for the most attractive returns. By participating in an incubation program as well, the investor will have the opportunity to allocate more assets to the manager in the future – a potentially valuable future right.

Article: What happened with the Quants?

Leave a reply

I wrote this article last October after a presentation made at a Southeastern Hedge Fund Association meeting. The title of presentation was “A Feature Presentation with Matthew Rothman, Managing Director and U.S. Head of Quantitative Portfolio Strategies, Lehman Brothers, Inc.” The meeting was held October 23, 2007 at The Ritz Carlton (Buckhead) in Atlanta, Georgia. Attendees included manager’s from Atlanta’s hedge funds, administrators, prime brokerage representatives and, of course, hedge fund lawyers.

October 24, 2007

We know the basic story for the quant blow-up this summer: in the beginning of July a few very large multi-strategy funds started experiencing large losses (at around the same time that the sub-prime sector was experiencing a melt-down). The funds began getting margin calls and needed to raise liquidity quickly beginning a chain reaction which eventually sent stocks lower, fueling the need sell more to meet margin calls.

While this is an overly simplistic reading of what happened over the summer, this overview set the stage for a presentation by Dr. Mathew S. Rothman on Tuesday to the Southeastern Hedge Fund Association. With some of the finest members of the south east’s hedge fund community gathered to examine what exactly happened with the quants this summer, Dr. Rothman, current Managing Director and U.S. Head of Quantitative Portfolio Strategies at Lehman Brothers, discussed his views on the events.

For those in attendance, including fund managers, lawyers, accountants, administrators and CFAs, the central concern was not exactly what happened in August, but what those events would mean for quants and investors going forward.

What quant managers will need to be aware of in the future

Our law firm helps to form hedge funds for new and emerging managers, including managers who are quants. It is common for lawyers and other service providers to explain to managers, especially new and emerging managers, what potential investors will look for from a quant program. We often provide clients with input on their pitchbooks and how they should “sell” their program to potential investors. In the wake of the quant blow-up this summer, and the insights provided by Dr. Rothman, we will be highlighting the following points for our quant clients.

Increase Transparency

The most important thing for potential investors is transparency. The more transparency a manager provides, the easier it is going to be to raise money. (Obviously this is not strictly true for the large established funds with stellar track records.) Quant is not an asset class and a quant program cannot be the sales pitch – emerging quant managers will need to sell their “type” of quantitative program. Managers need to get away from the “black box” mentality open up a bit, tell investors some of the inputs that will be used and also let investors know some of the inputs that will not be used – this is what we look at, this is what we throw away.

Be prepared to talk about Risk Management

Quant managers should have a good understanding of the risks of their program and be able to discuss these risks with investors. Specifically, managers will need to be able to discuss leverage and any human intervention or overrides of the models.

Understanding a program’s sustainable leverage levels is probably the most important risk management aspect of a quant program. While leverage provides a means to achieve incredible returns, it can also cripple a quant program. Levered programs may not be able to weather a prolonged downturn, which unlevered programs will.

[The fund managed by Dr. Rothman, which used no leverage, was actually up 30bps for August. While the fund was down 7% over 9 days, he was able to stick to his model because he did not have to unwind positions in order to meet margin calls. In contrast, Marketwatch reported that Goldman’s Global Alpha fund was down 22.5% for the month and J.P. Morgan’s Highbridge Capital was down roughly 18%.]

The human element and interaction with the quant model is also an important part of risk management. A quant model is just that – a model. While the model is designed to weather storms to a certain extent, some managers will include a “human override” component to the program. In some instances, allowing for a human override could prove to be exactly the wrong the strategy. Dr. Rothman noted that quant programs who stuck to their models during August were generally those programs which caught the snap-back. Those managers who rebalanced their portfolios (weather for reason of leverage or the human override) were those managers who missed the nice snap-back and ultimately were worse off then if they had followed their programs.

Be prepared for questions related to the August blow-ups

Fat tails and black swans are now standard terms investors use when talking about quant programs. It is very likely that you will be asked about fat tails and black swans by future prospective investors. Does this mean we will tell advisers to rewrite their risk models? No. However, you should at least be able to answer the question as to why your models do not address this phenomenon and it is a good idea to understand a model’s limitations during these times.

The Conclusion

While we may not completely understand what exactly happened in August, it is clear that prospective future investors are aware of the limitations of quant models and will generally want to see more information from managers. While it is always up to the market to decide what any one manager will need to tell prospective investors, moving forward we will let our quant clients know that it would be wise to address the above items when crafting a description of their investment program and deciding how they will market their fund.

New York based Hedge Fund Group mulls self-regulatory regime

Leave a reply

A group of New York based hedge fund professionals (the New York Hedge Fund Roundtable) are establishing a group to explore the possibility of instituting a hedge fund professional society/ self-regulatory organization. Such a group might be welcome in the hedge fund landscape, which is seeing greater strides by state and federal securities regulation to reign in (and regulate) the industry.

According to their website,

The New York Hedge Fund Roundtable was founded on three governing principles:

1. Continuously educating roundtable members from the investing & hedge fund worlds on relevant industry topics & forecasts.
2. Initiating Best Practices & knowledge transfer to the broader hedge fund world, allowing members to leverage peer information exchange and positively affecting both the profession and others.
3. Creating an environment to support social networking, allowing members to effectively engage with peers while helping them build their own careers & businesses.

A SRO would hopefully stem the rise of future regulation. However, the hedge fund industry has proved to be a hard sell on any sort of self-regulation and with the SEC maxed out with other crises (i.e. investment banks), any legitimate push for hedge fund regulation at the federal level is likely years away.

For more information see: http://www.reuters.com/article/fundsFundsNews/idUSN3135262220080806

For more information on the New York Hedge Fund Roundtable, plesee see: http://www.newyorkhedgefundroundtable.org

Hedge fund to satisfy redemptions in “installments”

Leave a reply

Reuters is reporting that a 2.3 billion dollar Texas fund will be satisfying redemption requests in installments not to exceed 9 months from the redemption date. The Highland Crusader Fund, managed by SEC registered investment adviser Highland Capital Management, reportedly used the highly unusual move in order to avoid a fire sale of the firm’s illiquid assets. The fund invested in distressed assets.

There are many legal ways that funds can find ways to halt or slow redemptions. Generally funds’ legal documents are drafted to allow the management company the ultimate flexibility to slow or halt redemptions in certain instances. One clear cut way is through a hedge fund gate. Another way is through a general catch all provision which allows the manager to halt redemptions in certain “emergency” circumstances.

Last year this issue came to the forefront as many investors in certain funds rushed for the exit doors. The hedge funds halted redemptions because of the market turmoil and investors were not happy. It remains to be seen whether investors moving into the hedge fund space will pushback on these manager-friendly provisions.

ABL and distressed debt hedge funds are hot

4 Replies

For the past nine to twelve months a central question from anyone I meet is: with the markets the way they currently are – how is your business? The answer, maybe surprisingly, has been great. Each month we have more and more clients; each month there are new hedge fund managers who are eager to get their fund up and running. As the conventional wisdom goes, there is always a hot market somewhere and there will always be managers who think they have an edge and who can exploit that hot market. Which brings up the million dollar question – what is the hot market now?

Recently we’ve seen an increase in the amount of asset-based lending and distressed debt funds. With the market dynamics changing and the level of liquidity decreasing on a daily basis, a niche for smaller liquidity providers has arisen. These funds will focus on a variety of distressed debts and other types of assets – we’ve seen: real estate hedge funds focused the acquisition of land, single family homes, multi-family units and other retail properties; asset-based lending hedge funds; factoring hedge funds; distressed debt hedge funds which may buy and repackage certain types of debt including mortgages and credit card receivables. For a discussion on the structure of distressed debt hedge funds (and other hedge funds with hard to value assets) see structure of distressed debt hedge funds.

As noted in this week’s issue of Business Week, hedge funds are stepping up as buyers of pools of mortgages which the banks are selling at fire-sale prices. The article notes that oftentimes distressed debt hedge funds are leaner organizations which have more room to negotiate with borrower’s because of their cost basis in the loan. Because of this, and because their employees deal with far fewer borrowers on a daily and weekly basis, the fund’s are able to fashion more manageable terms to borrowers.

The Business Week article can be located at:

http://www.businessweek.com/ap/financialnews/D928D3480.htm

Thinking about Hedge Fund E&O insurance?

1 Reply

If so, you better be aware of any potential liabilities against your organization. In an action against a hedge fund insurance company, an insured investment adviser lost in a claim against the insurance company for $5 million in losses. The reason the investment adviser lost the claim is, centrally, because they should have revealed to the insurance company that they could be subject to future suit. The actual reason for the suit was because the investment adviser took on leverage in excess of the limits which were disclosed in the fund’s private placement memorandum. This situation again highlights the perils of hedge fund style drift and/or improper disclosure of the proposed investment program within the private placement memorandum.

The case is:MDL Capital Management v. Fed. Ins. Co., (W.D. Pa. July 25, 2008).

SEC cracks down on lax AML implementation

1 Reply

Yesterday the SEC ordered E*Trade to comply with the AML rules which requires brokers to know the identity of their clients. The order found that E*Trade did not verify the identities of 65,442 secondary accountholders. While this is a major breach of the AML rules, it also shows that the SEC is continuing to be vigilant in this time of economic uncertainty and market turmoil.

The full text can be found below and at: http://www.sec.gov/news/press/2008/2008-156.htm

SEC Orders E*Trade Brokerage Firms to Comply With Anti-Money Laundering Rule

FOR IMMEDIATE RELEASE
2008-156

Washington, D.C., July 30, 2008 — The Securities and Exchange Commission today charged E*Trade Clearing LLC and E*Trade Securities LLC (collectively, E*Trade) for failing to comply with an anti-money laundering rule that requires broker-dealers to verify the identities of their customers and document their procedures for doing so.

The SEC’s order finds that E*Trade failed to accurately document certain Customer Identification Program (CIP) practices and verify the identities of more than 65,000 of its customers as required by the USA PATRIOT Act and SEC rules. E*Trade agreed to settle the SEC’s enforcement action without admitting or denying the allegations, and will pay $1 million in financial penalties.

“E*Trade is one of the largest online brokerage firms in the world, and a compliance lapse of this type has the potential to undermine the nation’s anti-terrorism and anti-money laundering efforts,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “The penalty and undertakings imposed in today’s enforcement action reflect the critical nature of anti-money laundering rules, and will provide greater assurance that future compliance will be seriously and continuously monitored.”

Cheryl Scarboro, Associate Director in the SEC’s Division of Enforcement, added, “On several occasions, E*Trade personnel discovered and rediscovered its CIP deficiency. However, E*Trade did not initiate any corrective action until the problem resurfaced almost two years after the compliance deadline. E*Trade’s 20-month period of noncompliance clearly resulted from a disjunctive organizational structure and inadequate management of its CIP responsibilities.”

The SEC’s order finds that E*Trade established, documented and maintained a CIP that specified that it would verify all accountholders in a joint account. However, during a 20-month period, E*Trade failed to follow the verification procedures set forth in its CIP. The order finds that E*Trade did not verify the identities of secondary accountholders in newly opened joint accounts. Consequently, the order finds that E*Trade’s documented procedures differed materially from its actual procedures.

The SEC’s order specifically finds that, from October 2003 to June 2005, E*Trade did not verify the identities of 65,442 secondary accountholders in joint accounts as required by the CIP rule and its own procedures. The SEC’s order further finds that E*Trade’s compliance failure was systemic, resulting from lack of a cohesive organizational structure, lack of adequate management oversight, and miscommunications among personnel in several E*Trade business groups.

E*Trade consented to the issuance of an order instituting administrative and cease and desist proceedings for violations of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder. In addition to the financial penalties, E*Trade agreed to a censure and to retain a qualified independent compliance consultant to verify the adequacy of its CIP rule compliance program.

In advance of settling this matter, E*Trade stated that it submitted the secondary accountholder information on joint accounts originally missed to its third-party vendor for verification. According to E*Trade, the verification process did not identify any joint accounts that should not have been opened.

SEC issues Interpretive Letter on Solicitors

Leave a reply

Analysis to be forthcoming…

See http://www.sec.gov/divisions/investment/noaction/2008/mayerbrown072808-206.htm

The Text:

Investment Advisers Act of 1940 — Rule 206(4)-3
Mayer Brown LLP — Interpretative Letter

July 28, 2008

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT		 Our Ref. No. 20087251738
Mayer Brown LLP
File No. 132-3

This letter replaces the letter that we issued to you on July 15, 2008 (“Original Letter”).1 We are replacing the Original Letter to make minor, non-substantive changes to it.2 This letter does not, however, alter the relief granted in the Original Letter. This letter should be deemed to be issued as of the date of the Original Letter, July 15, 2008.

By letter dated July 7, 2008, you request that we clarify that Rule 206(4)-3 under the Investment Advisers Act of 1940 (“Advisers Act”) does not apply to an investment adviser’s cash payment to a person solely to compensate that person for soliciting investors to invest in an investment pool3 managed by the adviser.

You state that several staff members of the Securities and Exchange Commission (“Commission”) have orally expressed the view that Rule 206(4)-3 does not apply to the payment of a cash fee by an investment adviser to a person solely to compensate that person for soliciting investors to invest in an investment pool managed by the adviser.4 You believe that these statements are consistent with statements recently made by the U.S. Court of Appeals for the District of Columbia Circuit in Goldstein, et al. v. Securities and Exchange Commission (“Goldstein“).5 You express concern, however, that certain SEC staff no-action letters6 suggest that Rule 206(4)-3 applies to cash payments by registered advisers to persons who solicit investors to invest in investment pools. Consequently, you request that we clarify that Rule 206(4)-3 does not apply to cash payments by a registered investment adviser to a person solely to compensate that person for soliciting investors to invest in an investment pool managed by the adviser.

DISCUSSION

Section 206(4) of the Advisers Act makes it unlawful for any investment adviser to engage in any act, practice or course of business that is fraudulent, deceptive or manipulative, and authorizes the Commission by rules and regulations to define and prescribe means reasonably designed to prevent such acts, practices and courses of business. Rule 206(4)-3 under the Advisers Act makes it unlawful for any investment adviser that is required to be registered under Section 203 of the Advisers Act (for purposes of this letter, a “registered investment adviser”) to pay a cash fee, directly or indirectly, to a solicitor7 “with respect to solicitation activities” unless the payments are made in compliance with conditions specified in the Rule. The Commission intended for Rule 206(4)-3 to address the conflicts of interest inherent in certain cash solicitation arrangements.8

We believe that Rule 206(4)-3 generally does not apply to a registered investment adviser’s cash payment to a person solely to compensate that person for soliciting investors or prospective investors for, or referring investors or prospective investors to, an investment pool managed by the adviser. While the Rule literally could apply to such payments, we believe that the Commission did not intend for the Rule to apply to those payments, for a number of reasons. First, neither the Proposing Release nor the Adopting Release contains any statement directly or indirectly suggesting that the Rule would apply to investment advisers’ cash payments to others solely to compensate them for soliciting investors for investment pools managed by the advisers. While not dispositive of the issue, we believe that the absence of any such statements by the Commission suggests that it did not intend that the Rule should apply to such payments. Second, the Rule is designed so as to clearly apply to solicitations and referrals in which the solicited or referred persons might ultimately enter into investment advisory contracts with the investment adviser,9 yet investors in investment pools (as such) do not typically enter into investment advisory contracts with the investment advisers of the pools. Third, the Rule’s use of the terms “client” and “prospective client,” rather than “investor” or “prospective investor,” also strongly suggests that the Rule was intended to apply to solicitations and referrals in which the solicited or referred persons might ultimately enter into investment advisory contracts with the investment adviser.

Furthermore, the Goldstein decision supports the conclusion that the Rule generally does not apply to advisers’ cash payments to others solely to compensate them for soliciting investors to invest in investment pools managed by the advisers. In Goldstein, the court indicated that, for purposes of Section 206 of the Advisers Act, investors in a pooled investment vehicle are not “clients” of the investment adviser of the pool. Similarly, we believe that the references to “client” and “prospective client” in Rule 206(4)-3 under the Advisers Act should not be interpreted to include investors in investment pools or prospective investors in investment pools.

Whether a registered investment adviser’s cash payment to a person is being made solely to compensate that person for soliciting investors or prospective investors for, or referring investors or prospective investors to, an investment pool managed by the adviser will depend upon all of the facts and circumstances of the particular case. In our view, the most pertinent facts and circumstances generally will be those relating to the nature of the arrangement between the soliciting/referring person and the investment adviser, the nature of the relationship between the investment adviser and the solicited/referred person, and the purpose of the adviser’s cash payment to the soliciting/referring person.

For example, the Rule would not appear to apply to a registered adviser’s cash payment to a person for referring other persons to the adviser where the adviser manages only investment pools and is not seeking to enter into investment advisory relationships with other persons, and the adviser’s cash payment, under the adviser’s arrangement with the referring person, compensates the referring person solely for referring the other persons to the adviser as investors or as prospective investors in one or more of the investment pools managed by the adviser.10 In contrast, the Rule would appear to apply if the adviser manages or seeks to manage investment pools and individual accounts, is seeking to enter into investment advisory relationships with other persons, and the adviser’s cash payment, under the adviser’s arrangement with the referring person, compensates the referring person for referring the other persons as prospective advisory clients. Again, whether the Rule applies or not would depend upon all of the facts and circumstances of the particular situation.

Even if Rule 206(4)-3 does not apply to a particular situation, the soliciting/referring person may generally be required by Section 206 of the Act to disclose to the investor or prospective investor material facts relating to conflicts of interest. Depending upon the facts and circumstances, a soliciting/referring person may be “advising others … as to the advisability of investing in … securities” within the meaning of Section 202(a)(11) of the Advisers Act,11 and thus may be an investment adviser subject to Section 206 of the Advisers Act. As interpreted by the courts and the Commission, Section 206 requires investment advisers to disclose to their clients and prospective clients material facts relating to conflicts of interest.12

To the extent that the view we express in this letter is inconsistent or conflicts with views that we have expressed previously, see, e.g., note 6, supra, our view today supersedes them.13

Douglas Scheidt
Associate Director and Chief Counsel

Endnotes

1 Mayer Brown LLP, Our Ref. No. 20087141629, SEC Staff No-Action Letter (July 15, 2008).

2 This letter replaces the reference to “206(4)(a)(1)(iii)” (in footnote 8 of the Original Letter, which corresponds to footnote 10 of this letter) with “206(4)-3(b)”. It also makes other minor, non-substantive changes in the same footnote.

3 As used in this letter, the term “investment pool” is an investment company, as defined under Section 3(a)(1) of the Investment Company Act of 1940 (“Investment Company Act”), or a company that would be an investment company but for an exclusion from the definition of investment company provided by Section 3(c) of the Investment Company Act.

4 See, e.g., Compliance Reporter, Plaze Says Letter On Cash Solicitations Was Misinterpreted (July 14, 2006) and comments made by Commission staff members at the Commission’s CCO Outreach Program on June 29, 2006.

5 451 F.3d 873 (D.C. Cir. 2006). In Goldstein, the court vacated as arbitrary Rule 203(b)(3)-2 under the Advisers Act, which required investment advisers to certain investment pools to count the shareholders, limited partners, members or beneficiaries of the pools as “clients” for purposes of Section 203(b)(3) of the Act. In doing so, the court reasoned that the shareholders, limited partners, members or beneficiaries of such pools could not reasonably be considered to be “clients” of the pools’ investment advisers. Id. at 881.

6 See, e.g., Dana Investment Advisors, Inc., SEC Staff No-Action Letter (Oct. 12, 1994); Dechert Price & Rhoads, SEC Staff No-Action Letter (Dec. 4, 1990); Stein Roe & Farnham Incorporated, SEC Staff No-Action Letter (June 29, 1990).

7 Rule 206(4)-3(d)(1) under the Advisers Act defines “solicitor” to mean “any person who, directly or indirectly, solicits any client for, or refers any client to, an investment adviser.” Section 202(a)(16) of the Advisers Act defines “person” to mean “a natural person or a company.” Rule 206(4)-3(d)(2) under the Advisers Act defines “client” to include any prospective client.

8 See Requirements Governing Payments of Cash Referral Fees by Investment Advisers, Advisers Act Release No. 615 (Feb. 2, 1978) (“Proposing Release”); Requirements Governing Payments of Cash Referral Fees by Investment Advisers, Advisers Act Release No. 688 (July 12, 1979) (“Adopting Release”).

9 For example, subsection (a)(2)(B) of the Rule requires that the investment adviser must receive certain acknowledgements from the client, “prior to, or at the time of, entering into any written or oral investment advisory contract with such client…” (emphasis added).

10 If Rule 206(4)-3 under the Advisers Act does not apply to such an investment adviser, it follows that, among other things, the referring person would not be required by the Rule to provide the investor or the prospective investor with either the separate written disclosure document specified in Rule 206(4)-3(b) under the Act or the investment adviser’s written disclosure statement specified in Rule 204-3 under the Act.

11 Applicability of the Investment Advisers Act to Financial Planners, Pension Consultants, and Other Persons Who Provide Investment Advisory Services as a Component of Other Financial Services, Advisers Act Release No. 1092 (Oct. 8, 1987) (footnote omitted).

12 See, e.g., Securities and Exchange Commission v. Capital Gains Research Bureau, Inc., et al., 375 U.S. 180, 194 (1963).

13 You have not asked, and this letter does not address, whether a person’s receipt of cash compensation from an investment adviser of an investment pool for soliciting or referring investors or prospective investors to invest in the pool would result in the person being considered a “broker” under Section 3(a)(4) of the Securities Exchange Act of 1934.