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No-Action Letter under:
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| RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF INVESTMENT MANAGEMENT |
Legg Mason Wood Walker, Inc., et al. File No. 801-6767 |
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 Legg Mason Wood Walker, Incorporated ("Legg Mason"), a broker-dealer and investment adviser registered with the Commission, any of its associated persons, Thomas M. Daly, Jr. ("Daly"), or Joseph A. Sullivan ("Sullivan"), a cash fee, directly or indirectly, for the solicitation of advisory clients in accordance with Rule 206(4)-3, notwithstanding a Commission administrative order (the "Order") that otherwise would preclude such an investment adviser from paying Legg Mason, Daly, or Sullivan a solicitation fee.1
Rule 206(4)-3 under the Advisers Act 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 has been found by the Commission to have engaged, or has been convicted of engaging, in any of the conduct specified in Sections 203(e)(1), (5), or (6) of the Advisers Act.
Our position is based on the facts and representations in your letter dated June 11, 2001, particularly your representations that Legg Mason, Daly, and Sullivan will: (1) conduct any solicitation arrangement entered into with any investment adviser that is required to be registered under the Advisers Act in compliance with all of the applicable provisions of Rule 206(4)-3; (2) use their best efforts to ensure that any adviser with which they, or any of them, have a solicitation arrangement describes the arrangement to the extent required in Part II of the adviser's Form ADV; and (3) for ten years from the date of the entry of the Order, discuss the Order in the separate written disclosure document that they, or any of them, are required to deliver under Rule 206(4)-3. This position applies only to the Order, and not to any other bases for disqualification under Rule 206(4)-3 that may exist or arise with respect to Legg Mason, any of its associated persons, Daly, or Sullivan.
Stephan N. Packs
Senior Counsel
| 1 | In the Matter of Legg Mason Wood Walker, Incorporated, Thomas M. Daly, Jr., and Joseph A. Sullivan, Admin. Proc. File No. 3-10068, Securities Exchange Act Rel. No. 34-44407 (June 11, 2001). |
June 11, 2001
CONFIDENTIAL PURSUANT TO 17 C.F.R. &sec; 200.83
Douglas J. Scheidt, Esquire
Associate Director and Chief Counsel
Division of Investment Management
United States Securities and Exchange Commission
Mail Stop 0506
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: In the Matter of Legg Mason Wood Walker, Incorporated, Thomas M. Daly, Jr., and Joseph A. Sullivan, Admin. Proc. File No. 3-10068, Securities Exchange Act Rel. No. 34-44407 ( June 11, 2001)
Dear Mr. Scheidt:
Our firm represents Legg Mason Wood Walker, Incorporated ("Legg Mason"), a broker-dealer registered under the Securities Exchange Act of 1934 ("Exchange Act"), Thomas M. Daly, Jr. ("Daly") and Joseph A. Sullivan ("Sullivan") (collectively, the "Respondents"). The Respondents have settled the above-referenced proceeding, and they seek assurance that the staff of the Division of Investment Management (the "Staff") would not recommend any enforcement action to the Securities and Exchange Commission ("Commission") under Section 206(4) of the Investment Advisers Act of 1940 ("Advisers Act") or Rule 206(4)-3 (the "Rule") thereunder, if an investment adviser that is required to be registered pursuant to Section 203 of the Advisers Act pays Legg Mason, any of its associated persons, Daly or Sullivan a cash fee for the solicitation of advisory clients for the investment adviser, notwithstanding certain disqualifying events described below. The events described below will not result in the Respondents being prohibited or suspended from acting as or being associated with an investment adviser and do not relate to the solicitation of advisory clients. Therefore, an investment adviser that is required to be registered pursuant to § 203 of the Advisers Act should not be prohibited from paying Legg Mason, any of its associated persons, Daly or Sullivan a cash fee for the solicitation of advisory clients. We note in support of this request that the Staff in other instances has granted no-action relief under the Rule for similar reasons.
BACKGROUND
Legg Mason is a Maryland corporation registered with the Commission as an investment adviser under the Advisers Act, and as a broker-dealer under the Exchange Act.
Daly is a Legg Mason Senior Vice President. From at least June 30, 1994 to April 18, 1997, Daly managed Legg Mason's municipal securities sales and trading and public finance functions.
Sullivan is a Legg Mason Senior Vice President. Since April 18, 1997, Sullivan has managed Legg Mason's Fixed Income Department, including its municipal securities sales and trading function.
The staff of the Division of Enforcement engaged in settlement discussions with the Respondents in connection with the above-captioned proceeding, which has been brought pursuant to Sections 15(b), 15B(c), 19(h) and 21C of the Exchange Act. As a result of these discussions, the Respondents submitted offers of settlement. In their respective offers of settlement, solely for the purpose of resolving the above-captioned proceeding and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, the Respondents consented to the entry of an order (the "Order")1 without admitting or denying the matters set forth therein (other than those relating to the jurisdiction of the Commission).
Under the Order, the Commission found, without admission or denial by Legg Mason, that, with respect to Legg Mason's participation in advance refundings and initial offerings of municipal securities from June 30, 1994 through June 30, 1998, Legg Mason willfully violated Municipal Securities Rulemaking Board ("MSRB") Rules G-36(b)(i) and (ii) in that it failed to file, or filed delinquently, documents required to be filed under those rules. The Commission also found that, with respect to Legg Mason's participation in advance refundings and initial offerings of municipal securities during the relevant period, Legg Mason willfully violated MSRB Rule G-27(a) in that it failed to supervise the conduct of Legg Mason's municipal securities business and the municipal securities activities of its associated persons to ensure compliance with MSRB Rules G-36(b)(i) and (ii).
Moreover, the Commission found, without admission or denial by Legg Mason, that, with respect to Legg Mason's participation in all offerings and transactions of municipal securities during the relevant period, Legg Mason willfully violated MSRB Rules G-27(b), (c)(i), (c)(iv), (c)(v) and (e) in that it failed to designate principals responsible for supervision of its municipal securities business and the municipal securities activities of its associated persons as required by Rule G-27; failed to keep a written record of that supervisory designation and of the designated principal's responsibilities under Rule G-27; failed to adopt, maintain and enforce written supervisory procedures that (i) state how a designated principal shall monitor for compliance by the dealer with the applicable rules, (ii) provide for the periodic review by a designated principal of each office which engages in municipal securities activities, or (iii) provide for the maintenance and preservation, by a designated principal, of the books and records required to be maintained and preserved by MSRB Rules G-8 and G-9; failed to revise and update its written supervisory procedures as necessary to respond to changes in MSRB or other rules and as other circumstances require, or to review annually its supervisory system and written supervisory procedures to determine whether they are adequate and up-to-date; and failed to ensure that Legg Mason was in compliance with Rule G-27.
The Commission found, without admission or denial by Daly, that, from at least June 30, 1994 through April 18, 1997, Daly was a cause of Legg Mason's violations of MSRB Rules G-36(b)(i) and (ii) in that he knew or should have known of Legg Mason's Rule G-36 violations yet he did not cure those violations or otherwise ensure that Legg Mason complied with Rule G-36. Furthermore, the Commission found, without admission or denial by Daly, that, with respect to Legg Mason's participation in advance refundings and initial offerings of municipal securities during the relevant period, Daly willfully violated MSRB Rule G-27(a) in that he failed to supervise the conduct of Legg Mason's municipal securities business and the municipal securities activities of its associated persons to ensure compliance with MSRB Rules G-36(b)(i) and (ii).
The Commission found, without admission or denial by Sullivan, that, from at least April 18, 1997 through February 1999, Sullivan was a cause of Legg Mason's violations of MSRB Rules G-36(b)(i) and (ii) in that he knew or should have known of Legg Mason's Rule G-36 violations yet he did not cure those violations or otherwise ensure that Legg Mason complied with Rule G-36. The Commission also found, without admission or denial by Sullivan, that, with respect to Legg Mason's participation in advance refundings and initial offerings of municipal securities during the relevant period, Sullivan willfully violated MSRB Rule G-27(a) in that he failed to supervise the conduct of Legg Mason's municipal securities business and the municipal securities activities of its associated persons to ensure compliance with MSRB Rules G-36(b)(i) and (ii).
Based on these findings, the Order provides that the Respondents be censured. The Order requires Legg Mason to cease and desist from committing or causing any violations and any future violations of MSRB Rules G-27(b), (c)(i), (c)(iv), (c)(v), (e) and G-36(b)(i) and (ii), as well as of Rule G-27(a) as it relates to Rule G-36. The Order requires Daly and Sullivan to cease and desist from committing or causing any violations and any future violations of MSRB Rules G-36(b)(i) and (ii) and Rule G-27(a) as it relates to Rule G-36. Furthermore, the Order requires Legg Mason to pay a civil money penalty of $50,000, requires Daly to pay a civil money penalty of $10,000, and requires Sullivan to pay a civil money penalty of $10,000. Legg Mason must, pursuant to the terms of the Order, retain an independent consultant to determine whether the policies, procedures and practices developed by Legg Mason to prevent and/or correct the types of improper conduct described in Section II.C of the Order have been implemented, and to recommend that these policies and procedures be supplemented if necessary. Legg Mason will implement the policies and procedures recommended by the independent consultant in a timely manner, pursuant to Section III.G of the Order.
EFFECT OF THE ORDER UNDER RULE 206(4)-3
Rule 206(4)-3 prohibits an investment adviser from paying a cash fee, directly or indirectly, to any solicitor that has been found by the Commission to have engaged in "conduct specified in paragraphs (1), (5) or (6) of section 203(e) of the [Advisers] Act." 17 C.F.R. &sec; 275.206(4)-3(a)(1)(ii) (1999). Because the Order finds that Legg Mason, Daly and Sullivan have engaged in conduct specified in paragraphs (5) and (6) of that section, the Commission could take the position that, for purposes of the Rule, the Respondents have engaged in conduct that would disqualify them from receiving cash payments for the solicitation of advisory clients.
DISCUSSION
The Respondents hereby request that the Staff provide assurance that, notwithstanding the entry of the Order, it will not recommend enforcement action to the Commission under the Rule if any investment adviser that is required to be registered under the Advisers Act pays to Legg Mason, any of its associated persons, Daly or Sullivan a cash fee for the solicitation of advisory clients in accordance with the Rule. The grounds for this request are as follows:
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 . . . has engaged in any of the conduct set forth in Section 203(e) of the [Advisers] Act . . . and 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
None of the disqualifying events described above bars, suspends, or limits the Respondents from acting as investment advisers or from associating with a registered investment adviser, and the conduct at issue was not related to the solicitation of advisory clients. Accordingly, no reason exists to prohibit an investment adviser that is required to be registered pursuant to § 203 of the Advisers Act from paying Legg Mason, any of its associated persons, Daly or Sullivan a cash fee for the solicitation of advisory clients. In this regard, the Commission stated:
[A] finding that a person has engaged in the conduct specified in Section 203(e) [of the Advisers Act] only authorizes and does not require the Commission to bar such persons 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
We respectfully submit that this is such a circumstance and that the granting of no-action relief would not be inconsistent with the public interest.
We note in support of this request that the Staff in other instances has granted no-action relief under the Rule for similar reasons. See, e.g., J.B. Hanauer & Co., SEC No-Action Letter, 1999 SEC No-Act. LEXIS 473 (April 27, 1999); Hickory Capital Management, Inc., SEC No-Action Letter, 1993 SEC No-Act. LEXIS 408 (February 11, 1993); Oppenheimer & Co. Inc., SEC No-Action Letter, 1992 SEC No-Act. LEXIS 812 (June 5, 1992); Kidder, Peabody & Co. Inc., SEC No-Action Letter, 1992 SEC No-Act. LEXIS 557 (March 30, 1992); and RNC Capital Management Co., SEC No-Action Letter, 1989 SEC No-Act. LEXIS 175 (February 7, 1989).
UNDERTAKINGS OF THE RESPONDENTS
In connection with this request, Legg Mason, Daly and Sullivan undertake:
CONCLUSION
We respectfully request the Staff to advise us that it will not recommend enforcement action to the Commission if an adviser that is required to be registered pursuant to &sec; 203 of the Advisers Act pays Legg Mason, any of its associated persons, Daly or Sullivan a cash fee for the solicitation of advisory clients, notwithstanding the entry of the Order.
Please do not hesitate to contact me at (410) 332-8668 regarding this request.
Very truly yours,
Charles O. Monk, II
cc: Barry Isenman, Chief, Enforcement Branch 3
Stephan Packs, Senior Counsel, Office of Chief Counsel,
Division of Investment Management
| 1 | In the Matter of Legg Mason Wood Walker, Incorporated, Thomas M. Daly, Jr., and Joseph A. Sullivan, Admin. Proc. File No. 3-10068, Securities Exchange Act Rel. No. 34-44407 (June 11, 2001) |
| 2 | Requirements Governing Payment of Cash Referral Fees by Investment Advisers, Investment Advisers Act Release No. 615, 14 S.E.C. Docket 89, 1978 WL 20110 (Feb. 2, 1978) [hereinafter "Release No. 615"]. |
| 3 | Requirements Governing Payment of Cash Referral Fees by Investment Advisers, Investment Advisers Act Release No. 688, 17 S.E.C. Docket 1293, 1979 WL 18498 (July 12, 1979) [hereinafter "Release No. 688"]. |
| 4 | Release No. 615, supra note 1, 1978 WL 20110, at *3. |
| 5 | Release No. 688, supra note 2, 1979 WL 18498, at *9 n. 10. |
http://www.sec.gov/divisions/investment/noaction/legg061101.htm
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