SEC Says that 1940 Act Applies Even if Adviser Doesn’t Receive Compensation
The SEC’s Division of Investment Management has issued a Guidance Update clarifying that firms that provide investment management services to registered funds are deemed to be investment advisers under the Investment Company Act even if such firms to do not receive compensation. The Alert says that firms cannot claim exclusion from the Investment Company Act by declining to receive compensation. Where an advisory contract is assigned (e.g. acquisition), firms must comply with Rule 15a-4 to manage funds pending shareholder approval. Rule 15a-4 has several additional conditions including Board approval and a 150-day limit. The Notice clarifies that the language in the definition of investment adviser requiring compensation only applies to firms that are in the business of providing such services at cost to all clients.
OUR TAKE: This Notice does not break new legal ground, so we are assuming that the Staff has seen several firms try to avoid Rule 15a-4’s requirements. Also, this position may apply analogously to investment advisers trying to avoid Advisers Act registration on the theory that they don’t receive compensation.