Investment Advisers Act of 1940 - Section 206(4) and Rule 206(4)-3
ING Bank NV

August 31, 2005

Your letter dated May 5, 2005 requests guidance concerning rule 206(4)-3 under the Investment Advisers Act of 1940 (the "Act"). In essence, you request that we concur with your view that, under the circumstances described in your letter, an investment adviser that is registered or required to be registered with the Commission (an "investment adviser") may pay ING Bank N.V. (the "Settling Firm"), or any of its associated persons, a cash payment for the solicitation of advisory clients (a "cash solicitation fee") consistent with section 206(4) of the Act and rule 206(4)-3 thereunder notwithstanding the Commission administrative order relating to the Settling Firm (the "Commission Order").¹ The Commission Order instituted and settled an administrative proceeding against the Settling Firm pursuant to section 8A of the Securities Act of 1933 (the "Securities Act"). In the Commission Order, the Commission found that the Settling Firm violated section 5 of the Securities Act, but the Commission did not find that the Settling Firm willfully violated section 5.

Rule 206(4)-3 sets forth the conditions under which an investment adviser may not pay a cash solicitation fee to a person who solicits clients for him.² As relevant here, rule 206(4)-3(a)(1)(ii)(C) prohibits an investment adviser from paying a cash solicitation fee, directly or indirectly, to a solicitor: "who has been found by the Commission to have engaged . . . in any of the conduct specified in paragraph[] (5) . . ." of section 203(e) of the Act. The conduct specified in paragraph (5) of section 203(e) of the Act includes any willful violation of the Securities Act. Consequently, for purposes of rule 206(4)-3(a)(1)(ii)(C), a solicitor will have engaged in conduct specified in paragraph (5) only when the solicitor has been found by the Commission to have engaged in a willful violation of, as relevant here, the Securities Act.

Here, the Commission found in the Commission Order that the Settling Firm violated the Securities Act, but did not find that the violation was willful. Accordingly, the prohibition in the rule does not apply, and an investment adviser could pay the Settling Firm, or any of its associated persons, a cash solicitation fee, directly or indirectly, for the solicitation of advisory clients, notwithstanding the Commission Order. We note that the Commission Order provides no other basis for disqualification under rule 206(4)-3. This position applies only to the Commission Order and not to any other basis for disqualification under rule 206(4)-3 that may exist or arise with respect to the Settling Firm or any of its associated persons.

Sara P. Crovitz
Senior Counsel

Endnotes

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¹ Securities Act Release No. 8594 (July 26, 2005).

² Requirements Governing Payments of Cash Referral Fees by Investment Advisers, Investment Advisers Act Release No. 688 (July 12, 1979).

Incoming Letter

The Incoming Letter is in Acrobat format.

http://www.sec.gov/divisions/investment/noaction/ing083105.htm