SEC Division of Investment Management staff letter: Dana Investment Advisors, Inc.

12 OCT 1994

Our Ref. No. 94-S70-CC

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Dana Investment DIVISION OF INVESTMNT MAAGEMENT Advisors, Inc.

File No. 801-14828

Your letter of October 12, 1994 requests assurance that we

would not recommend enforcement action to the Commission if

Washington Hospital Services, Inc. ("WHS") proceeds as described in

your letter without WHS or its employees registering as investment

advisers under section 203 of the Investment Advisers Act of 1940

( "Advisers Act") or proceeding under rule 2 0 6 (4) - 3 thereunder. You also request assurance from the Division of Market Regulation that

it would not recommend enforcement action to the Commission under

section 15 (a) of the Securities Exchange Act of 1934 ("Exchange

Act") if WHS proceeds as described in your letter without WHS or its employees registering as broker-dealers under section 15 (b) of the Exchange Act.

Dana Investment Advisors, Incorporated ("Dana"), a registered

investment adviser, intends to organize a private investment fund

(the "Partnership") . that will be structured as a limited partnership under Wisconsin law. The Partnership will not be

registered under the Investment Company Act of 1940 (" Investment

Company Act") in reliance on section 3 (c) (1) thereunder. i Dana

will be the FundI s general partner and investment adviser.

Limited partnership interests ("Units") in the Partnership will be offered only to private hospitals that are members of the Washington State Hospital Ássociation, a not-for-profit Corporation

(the "Association") and certain qualifying affiliates (the

hospitals and their affiliates are collectively referred to as the

"Qualifying Hospitals"). Units will be offered and sold in private

transactions pursuant to Regulation D under the Securities Act of

1933 (" 1933 Act") and rule 506 thereunder. 2 .

The Association, through its wholly- owned subsidiary WHS,

proposes to enter into an agreement (the "Agreement") with the

Partnership under which WHS will disseminate information about

Partnership's existence to members of the Association eligible the

invest in the Partnership, and introduce Dana to such members. to will: WHS (1) provide Dana with certain public financial informtion about the Qualifying Hospitals, i Section 3 (c) (1) generally provides that any issuer whose

outstanding securities are owned by not more than one hundred

persons and which is not making and does not presently propose to

make a public offering of its securities is excepted from the

definition of an investment company.

2 You have not asked, and we express no opinion on, whether

the dissemination of informtion as proposed is consistent with the requirements of Regulation D under the 1933 Act, rule 506

thereunder, or the "no public offering" prohibition of section

3 (c) (1) of the Investment Company Act.

Modified: Effective November 4, 2022, Statements in this Letter Related to Rule 206(4)-3 are Withdrawn. Please consult the following web page for more information:
https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff￾statements

(2) request that Qualifying Hospitals fill out questionnaires

eliciting basic financial information,

(3) provide the Partnership with the names and addresses of Qualifying Hospitals, (4) personally introduce the appropriate officer of each

Qualifying Hospital to representatives of Dana,

(5) disseminate to Qualifying Hospitals general information about the existence of the Partnership through direct mailings, announcements in periodic newsletters, and brochures, and

(6) permit representatives of Dana who will be offering and

selling Units to rent a booth at the exhibit hall at the

Association's annual meeting to distribute the Partnership's

offering memorandum and sales literature and to discuss the

Partnership with Qualifying Hospitals.

The Partnership will pay WHS a fee (the "Fee") of up to .07%' per

annum of Partnership assets for WHS' services.

Investment Adviser Registration:

Section 202 (a) (11) of the Advisers Act defines an investment
adviser as one who, for compensation, engages in the business of

advising others, either directly or through publications or

writings, as to the value of securities or as to the advisability

of investing in, purchasing, or selling securities, or who, for

compensation and as part of a regular business, issues or

promulgates analyses or reports concerning securities. You state

that WHS and its employees will not be acting as investment

advisers. Specifically, you represent that the Agreement prohibits

WHS and its employees from, among other things:

(1) discussing with any person the advantages or disadvantages

of investments in general or of any particular investment,

including an investment in the Partnership,

(2) valuing, advising or recommending any investment,

including an investment in the Partnership,

(3) providing investment analyses, investment formulas or

investment guidelines,

(4) holding themselves out as investment advisers or persons

who provide investment advice,

(5) describing, recommending or endorsing Dana's services as

general partner of the Partnership or as the Partnership's

investment adviser, or .

(6) otherwise giving investment advice.

Furthermore, you state that WHS will not endorse or recommend

participation in the Partnership, will not perform any services

with respect to actual investment by Qualifying Hospitals, and will

have no role in advising the Partnership.

Based on the facts and representations in your letter, we

would not recommend enforcement action to the Commission if WHS or

its employees engage in the proposed arrangement without

registering as investment advisers under section 203 of the

Advisers Act. Any different facts or representations may require a

different conclusion. Moreover, this response expresses the

Division's position on enforcement action only and does not express

any legal conclusions on the issues presented.

Rul e 206 (4) - 3 :
You also request assurance that we would not recommend

enforcement action to the Commission if WHS or its employees

proceed under the Agreement without complying with rule 206 (4) -3 under the Advisers Act. Rule 206 (4) -3 prohibits any investment adviser from paying a cash fee, directly or indirectly,

to a "solicitor" with respect to solicitation activities unless

certain disclosures regarding the solicitor's relationship with the

investment adviser are made. "Solicitor" is defined under rule

206 (4) -3 to mean "any person who, directly or indirectly, solicits

any client for, or refers any client to, an investment adviser."

You state that Dana will act as investment adviser to the

Partnership under an agreement with the Partnership, and that

Dana's advisory client will be the Partnership, rather than the

Qualifying Hospitals. You maintain that, as a result, WHS will not

be "soliciting" clients for Dana by introducing Dana or bringing

the existence of the Partnership to the attention of Qualifying

Hospitals. You also point out that WHS will be paid by the

Partnership rather than directly by Dana. Therefore, you conclude

that no policy would be served by deeming WHS a solicitor.

In our view, the proposed arrangement raises precisely the

type of concerns that rule 206 (4) -3 was designed to address. WHS

has an interest in the successful distribution of the Partnership,

and notice of that interest, together with sufficient information

to evaluate the interest, Shoul~ be given to Qualifying Hospitals

at the time they are solicited.

Section 208 (d) of the Advisers Act prohibits any person,

indirectly, or through or by any other person, from doing any act

or thing which it would be unlawful to do directly under the

3 Our view is not changed by the fact that the Partnership

will be paying the Fee. As investment adviser to, and general

partner of, the Partnership, Dana has substantial influence over

the Partnership's business affairs, including the ability to

direct that the Fee be paid to WHS.

Advisers Act or any rule thereunder. Since it would be unlawful

for WHS to directly solicit clients for Dana without compliance

with rule 206 (4) -3, solicitation of Qualifying Hospitals ¡o invest

in the Partnership would be prohibited by section 208 (d) . Therefore, we are unable to assure you that we would not

recommend enforcement action against Dana and WHS under section 206

if they participate in the proposed arrangement without complying

with rule 206(4)-3.

Section 15 (a) of the Exchange Act:

The staff of the Division of Market Regulation has asked us to

inform you that they would not recommend enforcement action to the

Commission under section 15 (a) (1) of the Exchange Act if WHS or its

employees engage in the activities set forth in your letter without registering as a broker-dealer pursuant to section 15 (b) of the Exchange Act. You have not requested, and the staff of the

Division of Market Regulation is not expressing any opinion, on the

application of section 15 (a) to the activities of Dana and its

employees.
J~ R.~
Felice R. Foundos

At torney
4 The proposed arrangement is distinguishable from

arrangements whereby service or distribution fees are paid by a

registered investment company pursuant to rule 12b-1 under the

Investment Company Act. This response is not intended to suggest

that such arrangements would be subject to rule 206 (4) -3. See

Letter to Alan Rosenblat (pub. avail. Dec. 4, 1990); Stein Roe &

Farnham Incorporated (pub. avail. June 29, 1990).

:...3
Firstar Plaza Attorneys at Law in
P. O. Box 2113 Milwaukee and Madison. Wisconsin Madison. Wisconsin 53701-2113 West Palm Beach and Naples. Florida 608/251-5000 Phoenix. Arizona FAX 608/251-9166

Qunnes/Bmd
Investment Advisers Act of 1940/

§ 203(a); Rule 206(4)-3

October l2, 1994

ACT -:1l-fI - Ll -
SECTION ;2.0 S ( Ct ) Ms. Dorothy Donahue, Acting Chief Counsel

Division of Investment Management RULE Securities and Exchange Commission PUBLIC I 0 /1 ~.f 9 u Mail Stop 10-6 AVAILABILIT - L￾450 Fifth Street, N. W.

Washington, D.C. 20549

Ms. Cai te McGuire, Chief Counsel
Division of Market Regulation

Securi ties and Exchange Commission

Mail Stop 5-1

450 Fifth Street, N.W.

Washington, D.C. 20549

Re: Dana Investment Advisors, Inc.
Dear Ms. McGuire and Ms. Donahue:

We represent Dana Investment Advisors, Incorporated ("Dana"),

a Wisconsin corporation registered as an investment adviser under

the Investment Advisers Act of 1940, as amended ("Advisers Act") and under the laws of several states, including the States of Wisconsin and Washington. Dana is organizing a private investment

fund ("Fund ") in which investment will be limited to private

hospitals that are members of the Washington State Hospital

Association ("Association") and qualifying affiliates. The Fund

will be structured as a limited partnership under Wisconsin law.

Dana will be the general partner of the Fund and will enter into an

investment advisory agreement with the Fund to serve as the Fund's

investment adviser.

Units of limited partnership interests in the Fund ("Units")

will be offered and sold on behalf of the Fund by employees of

Dana, as corporate general partner. The general partner will not

recei ve any commissions or other compensation for its services in

offering and selling Units. The Units will be offered and sold in

private transactions pursuant to Regulation D under the Securities

Act of 1933, as amended (the "Securities Act") and Rule 506

thereunder, and pursuant to the Uniform Limited Offering Exemption,

Sections 460-44A-SOO et seq. of the Securities Act of Washington

(the "Washington Act"). The Fund will not be registered under the

Investment Company Act of 1940, as amended, in reliance on Section

3 ( c ) ( 1) thereof.
The Association, through its wholly-owned subsidiary,

Washington Hospital Services, Inc. ("WHS"), proposes to enter into

an agreement ("Agreement") with the Fund under which WHS will

receive a fee for its services in disseminating information about

the existence of the Fund to members of the Association eligible to

invest in the Fund and introducing the Fund's general partner to

such members. This letter seeks the concurrence of the staff that

implementation of the Agreement will not constitute WHS or its employees "brokers" or "dealers" wi thin the meaning of § 3 ( a ) of the Securities Exchange Act of 1934, as amended ("Exchange Act"),

subject to registration under § IS(a) thereof, "investment

advisers" within the meaning of § 202(a) of the Advisers Act,

subject to registration under § 203 (a) thereof, or solicitors under

Rule 206 (4) -3 under the Advisers Act.

Specifically, we respectfully request the following relief:

1. That the staff of the Division of Market Regulation
   advise us that it would not recommend enforcement action to theCommission if the proposed Agreement is implemented without WHS or its employees registering as broker-dealers under § 15 (a) of the Exchange Act.
2. That the staff of the Division of Investment Management

advise us that it would not recommend enforcement action to the

Commission if the proposed Agreement is implemented without WHS or

its employees registering as "investment advisers" under § 203(a)

of the Advisers Act or proceeding under Rule 206 (4) -3 thereunder.

We are submitting the following information in support of this

reques t :
Section I below provides background information about the

parties and the Fund.

Section II below describes the provisions of the proposed

Agreemen t between WHS and the Fund.

Section III below discusses the issues raised by this

request for no-action relief and precedent applicable thereto.

Attached hereto for the convenience of the staff is the

principal no-action letter on which this request relies: National

School Boards Association (available Feb. 13, 1984 with respect to

Exchange Act issues and Feb. 17, 1984 with respect to Advisers Act

issues) .
I. BACKGROUND INFORMTION

A. The Association

The Association is a not-for-profi t corporation whose voting

members consist of 54 private hospitals, 39 statutory district

hospi tals and two federal hospitals located in the State of

Washington. The Association has served as a trade association for

its member hospitals for more than 60 years. It is organized under

the laws of the State of Washington and, except for a tax on

political activities, qualifies as a tax-exempt organization under

Section SOI(c)(6) of the Internal Revenue Code, as amended (the

"Code") .
B . WHS

WHS is a wholly-owned, for-profit subsidiary of the Association incorporated effective January 1, 1988. It is governed by a board of directors consisting of the Chairman-Elect of the Association, the Vice President for Internal Operations for the Association, and five directors elected at large by the Association, as shareholder.

C. The Association's Services for Members

The Association performs a wide variety of services for its

member hospitals, including serving as an advocate for members'

interests in connection with public issues affecting health care,

sponsoring member meetings, presenting educational programs for

hospi tal personnel, and making technical advisory services relating

to organization, financing and health care delivery available to

member hospitals. In addition, through its subsidiary, WHS, the

Association (i) administers three state-authorized self-insurance

trusts for member hospitals,l and (2) facilitates the development

and availability of third-party services meeting the common service

needs of member hospitals. 2 In fulfilling this facilitating

function, WHS works to identify and investigate hospital service

needs that could be met by a common provider, to analyze the

products, performance and service costs of third-party providers of

such services, and to assist the providers it approves (and with

whom, in some cases, it has negotiated special price terms for

member hospitals) in marketing their services to member hospitals

and other health care providers. All fees earned by WHS inure to

the benefit of member hospitals, either directly, through the

funding of WHS' s services for members, or indirectly, in the form

of dividends available to the Association, WHS's not-for-profit

parent.
These trusts, formed pursuant to Washington statute,

include the Public Hospital District Unemployment Compensation

Trust, the Public Hospital District Workers' Compensation Trust,

and the Washington Hospitals Workers' Compensation Trust. Dana

serves as investment adviser for these trusts pursuant to an

investment advisory agreement with each trust. Dana also provides

investment advisory services under separate agreements with the

Washington Hospitals Insurance Trust (a health and welfare trust)

and the Washington State Hospital Association Education & Research

Foundation and manages a cash reserve fund for the Association

under an investment advisory agreement with the Association.

2 Services and programs developed in response to member needs

have included, among others, electronic billing services, Medicaid

eligibili ty verification services, patient data reports, computer-

based clinical nursing information, medical waste treatment and

disposal services, medical records review services, medical

equipment financing services, telemedicine services, physician

recrui tment and locum tenens services, and compensation, insurance and retirement benefits services for hospital employees.

D. Enti ties Entitled to Invest in the Fund Investment in the Fund will be limited to (i) the 54 private

hospi tal members of the Association (collectively, the "Qualifying

Hospi tals" ), and (ii) private clinics, nursing homes, hospices and

other health care providers that directly, or indirectly through

one or more intermediaries, control, are controlled by, or are

under common control with a Qualifying Hospital ( collectively, the

"Affiliates" ). Each Qualifying Hospital is located in and licensed

by the State of Washington and is a voting member of the Association. Forty-two of the Qualifying Hospitals are not-for profi t organizations exempt from federal income taxation under
Section 501(c) (3) of the Code, and the remainder are for-profit

enti ties.

E. The Fund

Hospitals and their affiliates frequently are faced with the

need to invest funds held in reserve accounts for expenditure

within a one- to five-year period. The amount of funds available

within a single entity's reserve accounts may make it impractical

for the entity to maintain and manage an individual investment

portfolio. The purpose of the Fund is to permit Qualifying

Hospi tals and Affiliates to maximize their investment returns by

pooling their funds available for investment in a managed

investment primarily in mortgage securities issued by United States

government agencies. 3
The Fund will be structured as a limited partnership under

Wisconsin law. Dana will be the general partner of the Fund and

will enter into an investment advisory agreement with the Fund to

manage the Fund's investments. For its services as investment

adviser, Dana will receive a fee of .50% (.0050) per annum of the

asset value of the Fund. 4 Investors' interests in the Fund will be

represented by "Units" of the Fund, which will be offered and sold

to Qualifying Hospitals and Affiliates by the general partner in

private transactions pursuant to Regulation D under the Securities

3 The Fund will invest primarily in intermediate-term

mortgage securities issued by United States government agencies.

However, the Fund also will be permitted to purchase intermediate-

term, high grade corporate mortgage securities.

4 Dana will not receive any fees as general partner, but it

may pay and be reimbursed for legal fees, accounting and audit fees

and general administrative expenses (such as postage, long distance telephone and copying expenses) incurred on behalf of the Fund.

Act and Sections 460-44A-500 et seq. under the Washington Act.

Units will not be transferable, but investors will be permitted to

purchase or redeem Units on a monthly basis. The general partner

will not receive any commissions or other compensation for sales or

redemptions of Units.

Fund assets will be held by a non-affiliated custodial bank,

and non-affiliated registered broker-dealers will effect all

purchases and sales of the Fund's portfolio securities. The Fund

will be audited annually by an independent certified public

accounting firm.
I I . THE PROPOSED AGREEMNT

The proposed Agreement contains the provisions described below. These provisions have been structured in light of provisions with respect to which the staffs of the Division of

Market Regulation and the Division of Investment Management

previously have taken no-action positions, as will be discussed in

greater detail in Section III below.

A. Provisions Reqardinq Services

The Agreement provides for WHS to perform the following

services for the Fund:

( 1 ) Provide the general partner of the Fund with certain public financial information about Qualifying Hospitals

and Affiliates.

(2) Ask Qualifying Hospitals and Affiliates to fill out questionnaires designed to elicit basic financial

information pertinent to investment in the Fund and

provide the completed questionnaires to the general

partner.
(3) Provide the Fund with the names and addresses of

Qualifying Hospitals and Affiliates, and with respect to

each such entity, provide the name and title of the

officer to whom information about the Fund should be directed. (4) Personally introduce to the appropriate officer of each

Qualifying Hospital and Affiliate, at a meeting at the

officer's office scheduled by WHS, the representatives of the general partner who will be offering and selling Uni ts . (5) Disseminate to Qualifying Hospitals and Affiliates general information about the existence of the Fund

(which information would include the telephone number of

the general partner and a response card for requesting information about the Fund from the general partner) through any combination of the following:

(a) Direct mailings to Qualifying Hospitals and Affiliates. (b) Announcements in WHS' s periodic newsletters to Association members.

(c) Brochures to be made available at WHS' s offices and

at the booths and tables that WHS sets up at

various meetings of the Association and of

subgroups of Association members. 5

(6) Permit those representatives of the general partner who will be offering and selling Units to rent a booth at the

exhibi t hall at the Association's annual meeting to

distribute the Offering Memorandum and sales literature

and to discuss the Fund directly with Qualifying

Hospitals and Affiliates.

B. Provisions Reqardinq Compensation

The proposed Agreement provides for WHS to be compensated by

the Fund for its services in an amount not to exceed .07% (.0007)

per annum of Fund assets, payable quarterly. Nei ther WHS nor the

two WHS employees who will carry out the services called for by the

Agreement will receive any fee or other form of compensation based

on sales of Partnership Units.

C. Provisions Reqardinq Explici tl v Prohibited Acti vi ties
The proposed Agreement prohibits WHS and its employees from

engaging in any of the following activities:

( 1 ) Discussing with any person the advantages or disadvantages of investments in general or of any particular investment, including an investment in the Fund. 5 The information contained in the mailings, announcements

and brochures will be very limited. It will consist of a general

announcement about the creation and purpose of the Fund, a

statement of the address and telephone numer of the general

partner from which information about the Fund may be obtained, and

a return card that can be sent to the general partner to request

information about the Fund.

(2) Valuing, advising or recommending any investment, including an investment in the Fund; providing analyses,

investment formulas or investment guidelines; or in any

way giving investment advice.

( 3) Taking part in face-to-face negotiations between the general partner and any Qualifying Hospital or Affiliate

with respect to the offer and sale of Units.

(4) Assisting any Qualifying Hospital or Affiliate in making a decision whether to purchase Units.

(5) Delivering the Offering Memorandum for the Fund or in any way holding themselves out as providing services involving sales of Units or other transactions in securities. (6) Holding themselves out as investment advisers or persons who provide investment advice.

(7) Describing, recommending or endorsing Dana's services as general partner of the Fund or as the Fund's investment adviser. ( 8 ) Receiving or handling any investor's Subscription Agreement or any funds to be used by an investor in purchasing Units. (9) Having any discretion with respect to the general partner's acceptance or rejection of any Qualifying

Hospi tal or Affiliate as an investor in the Fund.

D. Provisions Reqardinq Explicitlv Mandated Activities

The proposed Agreement requires WHS and its employees to:

(1) Refer all questions concerning participation in the Fund

to the general partner.

( 2) Send all requests for information (other than for the basic written information WHS is permitted to deliver

under the Agreement) directly to the general partner.

( 3 ) In connection wi th personal introductions of representatives of the general partner to representatives of Qualifying Hospitals and Affiliates:

(a) Make clear to the Qualifying Hospital and Affiliate that the introduction is being made pursuant to an

agreement between WHS and the Fund, under which

agreement WHS is entitled to compensation.

(b) Make clear to the Qualifying Hospital and Affiliate

that Dana, and not WHS or the Association, will be

the provider of any securities services.

(c) Leave the room after the introduction and take no

further part in the conversation or in any further

conversations between the parties.

E. Required Disclosures

The proposed Agreement:

(1) Requires the Offering Memorandum for the Fund to

disclose (a) the terms of the Agreement between WHS and

the Fund (inc 1 uding its compensation prov is ions), (b) the

fact that Dana (and not WHS or the Association) will be the provider of any securities services, and (c) the fact that neither WHS nor the Association are registered

broker-dealers or registered investment advisers.

(2) Requires literature describing the Fund to disclose the terms of the Agreement between WHS and the Fund

(including its compensation provisions).

F. Addi tional Representations

(i) WHS does not endorse or otherwise recommend participation in the Fund. This will be made clear in the Offering

Memorandum and other literature about the Fund.

(2) WHS will perform no services with respect to actual investment by Qualifying Hospitals and Affiliates and has

no role in advising the Fund.

III. DISCUSSION

We believe that the activities called for by the proposed

Agreement are not such as to bring WHS or its employees wi thin the

definitions of "broker" or "dealer" under the Exchange Act or

"investment adviser" under the Advisers Act or to constitute them

"solicitors" under Rule 206(4)-3. Further, because the Association

and WHS have no mission apart from their mission to serve the needs

of Association members, we believe that registration under either Act would serve no purpose. Our discussion of these points is organized as follows:

Paragraph A-I discusses the definitions of "broker" and

"dealer" under the Exchange Act and the reasons we believe

tha t WHS' s proposed services do not meet these def ini tions . Paragraph A-2 discusses the definition of "investment adviser II under the Advisers Act and the reasons we believe tha t WHS' s proposed services do not meet that def ini tion . Paragraph B-1 applies II finders agreement II no-action letters previously issued by the staff to the issues raised

herein under § 15 (a) of the Exchange Act.

Paragraph B-2 applies "membership organization" no-action

letter previously issued by the staff to the issues raised

herein under § 15 (a) of the Exchange Act and § 203 (a) of the Advisers Act and Rule 206(4)-3 thereunder. A. Definitions

i. Definitions of "Broker" and "pealer" Under Exchanqe Act

Section 3 ( a) ( 5) of the Exchange Act def ines "dealer II as any person, other than a bank, "engaged in the business of

buying and selling securities for his own account...." WHS

and its employees clearly will not be acting as "dealers"

under the Agreement because neither they nor the Association

are eligible to purchase Units in the Fùnd.

Section 3 ( a ) ( 4) of the Exchange Act def ines "broker" to
mean any person, other than a bank, "engaged in the business

of effecting transactions in securities for the account of others. " WHS and its employees will not be acting as "brokers" under the Agreement because they neither will be

"effecting transactions" in securities nor receiving

transaction-based compensation.

In order to "effect transactions" in securities, one must

" become involved in the negotiations... (or) undertake an

advisory, evaluative or decision-making function. ,,6 One who

undertakes none of these activities but, rather, merely

provides information concerning potential investors to an

6 Financial Charters & Acquisitions, Incorporated (available

Nov. 25, 1984), at 5, citing to the staff's statement in F. Willard

Griffith, II (available Oct. 7, 1974).

issuer or a broker-dealer and facilitates interaction between them is a "finder" and not a "broker. ,,7 As Section II-C (pp. 7-8) of this letter points out, the

Agreement prohibits WHS and its employees from taking part in

any negotiations regarding purchases and sales of Partnership Units and from undertaking any advisory, evaluative or decision-making functions. Instead, WHS merely will, like the

finders in Colonial Equities Corp.
8 and the membership

organizations in National School Boards Association9 and

American Medical Association10, provide basic informational

and introductory services to a person who is offering an

ivestment opportunity and, like the membership organizations

in National School Boards Association, American Medical

11 Association and Indiana Hospital Assn. Investment Funds,

assist in bringing the existence of the investment opportunity

to the attention of members.

Another element in determining whether a person is a

"broker" is whether the person receives transaction-based

compensation. As Section II-B (p. 7) of this letter points

out, neither WHS nor its employees will receive any fee or

other form of compensation based on sales of Partnership

Units. Instead, like the membership organizations in the no-

action letters cited above, WHS will receive compensation

measured solely by assets under management in the Fund.

2. Definition of "Investment Adviser" Under the Advisers Act

Under § 202(a) (11) of the Advisers Act, an "investment

adviser" is one who, for compensation (1) engages in the

business of advising others, either directly or through

publications or writings, as to the value of securities or as

to the advisability of investing in, purchasing, or selling

securities, or, alternatively (2) issues or promulgates

analyses or reports concerning securities as part of a regular

business.
7 See ide and no-action letters cited below.
8 Available June 28, 1988; discussed in i B-1, p. 13 below. 9 See Feb. 17, 1984 letter, discussed in i B-2, beginning at

p. 14 below.

10 Available Oct. 11, 1977; discussed in i B-2, pp. 15-16 below. 11 Available Oct. 15, 1993; discussed in note 19 below.

WHS and its employees will not be acting as "investment

advisers" because (1) they will not provide and will not be

"engaged in the business" of providing advice as to the value

of securities or as to the advisability of investing in,

purchasing or selling securities, and (2) they will not issue

or promulgate and will not be "engaged in the business" of

issuing or promulgating analyses or reports concerning

securi ties.

As Section II-C (pp. 7-8) of this letter points out, the

Agreement prohibits WHS and its employees from (i) discussing

wi th any person the advantages or disadvantages of investments in general or of any particular investment, including an

investment in the Fund; (ii) valuing, advising or recommending

any investment, including an investment in the Fund; (iii)

providing investment analyses, investment formulas or

investment guidelines; (iv) holding themselves out as

investment advisers or persons who provide investment advice;

(v) describing, recommending or endorsing Dana's services as general partner of the Fund or as the Fund's investment

adviser; or (vi) otherwise giving investment advice. Instead,

WHS's services are restricted to finders' services, i. e., to

providing basic information about Qualifying Hospitals and

Affiliates to the general partner and assisting in bringing

the existence of the Fund to the attention of Qualifying

Hospitals and Affiliates.

Because it will not in fact be providing investment

advice or issuing analyses or reports concerning securities,

WHS clearly will not be "engaged in the business ", of providing

investment advice or issuing analyses or reports concerning

securi ties. To paraphrase from the request for no-action

relief set forth in National School Boards Association

(discussed under! B-2 below), WHS is engaged in the business

of representing the interests of hospital members of the

Association, not "in the business" of providing investment

advice, and its finder's services under the Agreement will consti tute only a small part of the many services it provides to Association members.1

B. No-Action Letters

1 . "Finders Aqreement II No-Action Letters Respectinq § 15 ( a)

of the Exchanqe Act

The staff of the Division of Market Regulation has issued

a series of no-action letters that support the proposition

12 See February 13, 1984 letter, at p. 8.

that one who merely provides information concerning potential

investors to an issuer or a broker-dealer and facilitates

interaction between them is a "finder" and not a "broker. ,,13 For examRle, in H.C. Copeland and Associates Equities, Incorporated, 4 the staff determined that it would not

recommend action to the Commission if independent consultants

provided a registered broker-dealer wi th demographic

information about potential investors, and introduced the

broker-dealer to these investors, 15 wí thout first registering

under § 15 (a) of the Exchange Act. As will be the case with

WHS under the instant Agreement, the independent consultants

were prohibited from giving investment advice, distributing

sales literature, or participating in negotiations with

potential investors.

Similarly, in Financial Charters /; Acquisitions,

Incorporated, the staff granted no-action relief under § 15 (a)

of the Exchange Act to independent consultants who proposed to

enter into finders agreements with a broker-dealer engaged in

marketing hedging strategies for securities trading to

financial institutions. Under the agreements, the consultants

were to set up initial meetings between the broker-dealer and

financial institutions and to attend such meetings solely for the purpose of introducing the parties .16 As will be the case with WHS under the instant Agreement, the consultants

were prohibited from discussing, evaluating or recommending

the proposed investment, from taking any part in negotiations

respecting the proposed investment, and, following their

introduction of parties, from taking any further part in the

ini tial meeting (and from taking part in any subsequent

meetings) between the parties.

In Colonial Equities Corp., the staff took a no-action

posi tion with respect to the applicability of § 15 (a) to

services of independent insurance agencies under proposed

finders agreements with a registered broker-dealer selling

13 The services performed by a "finder" generally are characterized as "clerical and ministerial" in nature. See, e. g. , Retirement System Distributors, Incorporated (available February 7,

1992) and no-action letters cited at pp. 11-12 therein.

14 Available April 8, 1982.

15 Such services are like the services of WHS described in Section II-A ( 1 ) and (4 ) (p. 6 ) of this letter. 16 Such services are like the services of WHS described in Section II-A (4 ) (p. 6 ) of this letter.

interests in partnerships being syndicated by an affiliate.

The agreement provided for the agencies to ask clients to

complete questionnaires designed to elicit information pertinent to sui tabili ty standards for investment in the partnerships, to provide the completed questionnaires to the

broker-dealer, and to introduce clients identified as

potential investors to the broker-dealer in person or by

telephone.17 As will be the case with WHS under the instant

Agreement, the agreement provided that the agencies would not

offer explanations, advice or recommendations regarding an

investment in the partnerships, take part in negotiations

between clients and the broker-dealer, assist clients in

making investment decisions, or receive or handle any funds to

be used in purchasing interests in the partnerships. Further

(and again like WHS), agency personnel were required to leave

the room or get off the telephone, as applicable, following

the introduction of potential investors and to take no further

part in the conversation (or in any subsequent conversations)

between the parties.

We believe that these II finders agreement II no-action letters support our contention that WHS will not be acting as

a II broker II wi thin the meaning of § 3 ( a ) ( 4) of the Exchange Act.
2. "Membership Orqanization" No-Action Letters Respectinq

§ lS(a) of the Exchanqe Act and § 203(a) of the Advisers

Act and Rule 206 (4) -3 Thereunder In the II finders agreement II no-action letters, entities

wi th interests independent of the interests of potential

investors acted to bring investment opportunities to the

attention of such investors. By contrast, the no-action

letters discussed below focus on the activities of membership

organizations in bringing investment opportunities to the

attention of the members whose interests they were created to

serve. These no-action letters are pertinent to the issues

raised in the instant case under § 15 (a) of the Exchange Act

and § 203 (a) of the Advisers Act and Rule 206 (4) -3 thereunder. (a) Facts of National School Boards Association

The no-action letter most pertinent to the instant

Agreement (although it involved services more expansive than

the services WHS will perform) is National School Boards Association. In this no-action letter, the staffs of the 17 Such services are like the services of WHS described in

Section II-A (2)-(4) (page 6) of this letter.

l4

Division of Market Regulation and the Division of Investment

Management took respective no-action positions concerning the

applicabili ty of § 15 ( a) of the Exchange Act, § 203 ( a) of the

Advisers Act and Rule 206 (4) -3 under the Advisers Act to

services to be performed under a consulting agreement (the

"NSBA Agreement") between E. F. Hutton & Company ("Hutton")

and the National School Boards Association ("NSBA"), a not-

for-profit organization whose members consist of state school

board associations, local school boards and districts, and

other public educational entities.

The NSBA Agreement grew out of a decision by the NSBA, as

a service to its members, to work with Hutton to organize

liquid asset trusts on a state-by-state basis tailored exclusively for investment by local school districts (collectively, the "Trusts ") . Hutton was to serve as the administrator, investment adviser and distributor for the

Trusts. The NSBA Agreement provided for the NSBA to serve as

a consultant to Hutton at two stages of the development of the

Trusts: feasibility and operation.

At the feasibility stage, the NSBA was to consult with

Hutton regarding local markets, applicable local laws,

competing products, and whether Hutton should pursue

development of a Trust in the area. In addition, the NSBA was

to arrange for Hutton to meet with appropriate state and local

school district officials to discuss local finances and the

purpose of the Trusts. At the operational stage, the NSBA was

to: (a) schedule and announce through NSBA publications

informational meetings and seminars at which Hutton

representatives would discuss the Trusts and related matters,

(b) consult with Hutton and the state school board

associations about local facilities (such as custodial banks)

to be used in connection with the Trusts, (c) assist in the

preparation and dissemination of information with respect to

the existence of the Trusts, (d) allow the use of NSBA

publications to give information on how to obtain Trust

materials, (e) consult as to operational or coordinating

difficul ties that might arise between the Trusts and school

districts, (f) provide Hutton with mailing lists of NSBA

members, and (g) allow the Trusts to use the NSBA logo in informational materials. The NSBA Agreement provided that the NSBA would not: (i)

take part in face-to-face solicitations with respect to

participation in the Trusts, (ii) recommend participation in

the Trusts, (iii) answer specific questions about the Trusts,

or (iv) give investment recommendations, analyses, formulas,

guidelines or advice. In addition, Hutton, not the NSBA,

would distribute the Information Statement about a Trust to

potential settlors of the Trust (i.e., to the individual

school districts), and Hutton would be responsible for the

contents of all communications describing the Trusts. If a

School District decided to become a settlor of a Trust , it

would submit its registration form directly to the Trust, not

to the NSBA. The NSBA would have no responsibility for funds

and no discretion whether to accept or reject registration

forms, and would be required to send all requests for

information (except for preprinted materials) directly to

Hutton for appropriate action. Further, the agreement between

the NSBA and Hutton was to be disclosed in the Information

Statement.
The NSBA's compensation under the NSBA Agreement was a

fee of 20% of administration and investment advisory fees

received by Hutton (anticipated to be no more than .5% of

assets under management), plus reimbursement for out-of-pocket

expenses. Nei ther the NSBA nor its employees were to be

separately compensated for the offer or sale of shares of the

Trusts.
(b) The NSBA's Contentions With Respect to Reqistration under § 15 (a) of the Exchanqe Act: Applicabili tv in the Instant Case . The NSBA cited both precedent and policy in support of

its request for no-action relief under § 15 (a) of the Exchange

Act.
( 1 ) Preceden t
Wi th respect to precedent, the NSBA pointed to the

similarities between its services and those at issue in H. C.

Copeland and Associates Equities (described above) and

American Medical Association, in which the staff of the

Division of Market Regulation had granted no-action relief under § 15 ( a) in connection with services to be provided by the American Medical Association ("AM") as administrator to

the AM Tax Exempt Income Fund. In connection with that fund the AM was to: ( i) handle inquiries, except those concerning shareholder accounts and sales, (ii) permit the use of the AM name and provide access to its membership list and mailings,

(iii) provide advertising and sales materials and space in AM publications for publishing the prospectus and tombstone type announcements, and ( i v) provide a booth (to be manned by personnel of the distributor) at AM conventions and meetings

to distribute prospectuses and sales literature and to answer questions. The AM was prohibited from taking part in any face-to-face negotiations between the distributor and

potential investors (i. e., members of the AM or affiliated medical associations) and from answering inquiries with

respect to shareholder accounts and sales of fund shares. 18

We believe that National School Boards Association and

the precedents it cites support our view that WHS and its

employees will not be acting as "brokers" as defined by

§ 3 (a) (4) of the Exchange Act. The services at issue in H. C.

Copeland and Associates Equities are described at page 12

above. Wi th respect to those at issue in National School

Boards Association and American Medical Association, we

believe that the instant Agreement presents an even stronger

argument for no action than the NSBA and AM agreements

because (1) the instant Agreement calls for less expansive

services than did the other two agreements, and yet (2) the

instant Agreement includes all of the prohibitions against

"brokers' services" included in the other two agreements.

Thus, for example, WHS will not engage (as did the NSBA) in

"feasibili ty stage" consulting with respect to local markets,

local laws, competing products and Trust feasibility, or in

"operational stage" consulting with respect to facilities

(such as custodial banks) or the operational and coordinating

difficul ties encountered by the distributor. Moreover, WHS

(unlike the NSBA and AM) will not permit use of the

Association's logo in connection with the Fund and will not

( as did the AM) provide space in its publications for publishing the offering document for the Fund. At the same

time, WHS (like the NSBA and AM) will be prohibited from: (i)

taking part in any face-to-face negotiations or solicitations,

(ii) answering specific questions about the Fund, (iii) advising, valuing or recommending investments in the Fund,

(iv) delivering the offering document for the Fund, or recei ving or handling investors' subscriptions or subscription funds, or (v) having any discretion with respect to the

acceptance or rejection of qualifying members as investors.

Further, WHS (like the NSBA and the AM) will not receive any

commissions or other compensation based on sales of beneficial

interests in the Fund .19

18 See American Medical Association supra n. 10, at p. 2. 19 We were unable to find a no-action letter subsequent to

National School Boards Association addressing the same issues addressed therein. However, we believe that Indiana Hospital Assn.

Investment Funds (available Oct. 15, 1993) also supports our

contention that WHS will not be acting as "broker" under the

instant Agreement and thus should not be subject to registration under § 15 ( a) . In Indiana Hospi tal Assn. Investment Funds, the staff of the Division of Market Regulation took a no-action

position with respect to the applicability of § 15(a) to the

services of the Indiana Hospital Association ("IRA"), a not-for (continued. . . )

(2) Policy

wi th respect to policy, the NSBA contended that no policy

or purpose would be served by a requirement that it register

under § 15 (a) of the Exchange Act because (1) it was acting on

behalf of its members in helping develop an investment medium

available to members, and (2) the fees it earned would be used

solely to fund its activities on behalf of its members .20

Similarly, WHS will be acting on behalf of Association

members in bringing an investment opportunity available to

members to the members' attention, and its activities under

the Agreement will be fully disclosed. Moreover, the fees

earned by WHS will inure to the benefit of the Association's

members either directly, through the funding of WHS' s services

19 ( . . . continued) profit organization comprised of approximately 145 Indiana

hospi tals, in establishing and operating investment funds (" Funds" )

for investment by it and qualifying members and affiliates.

The facts of the letter, briefly sumarized, were as follows:

The IRA had proposed to establish a business trust ("Trust) for the

purpose of administering the Funds. The IRA was to manage the

Trust, as trustee, for which it was to receive compensation in the

form of an asset-based fee. Neither the IRA nor its employees were

to receive any commissions or other compensation based on sales of

beneficial interests in the Trust. Trust assets were to be held by a custodian bank; a registered investment adviser (retained by the Trust) was to advise the trustee with respect to the investment of

Trust assets; and a registered broker-dealer was to effect all

transactions in portfolio securities and all offers and sales of

beneficial interests in the Trust.

The activities of the IRA's officers, directors and employees

in connection with offers and sales of beneficial interests in the

Trust were described in the IRA's letter seeking no-action relief

only as activities "permitted by Rule 3a4-1(a) (4) (iii) (under the

Exchange Act)." The activities permitted by the Rule include,

among others, "performing ministerial and clerical work involved in

effecting any transaction. II Although no detail is given in the

letter requesting no-action relief, it seems likely, based on the

stated facts, that the IRA's ministerial and clerical activities

included bringing the existence of the Trust to its members'

attention and introducing IRA members to the broker-dealer selling

interests in the Trust.

20 National School Boards Association (Feb. 17, 1984 letter),

at p. s.

for members, or indirectly, in the form of dividends available

to the Association, WHS' s not-for-profi t parent. Accordingly,

we believe that no policy or purpose would be served by

requiring WHS to register under § 15 (a) .
(c) The NSBA's Contentions With Respect to Reqistration Under Section 203(a) of the Advisers Act;

Applicabili tv in the Instant Case

(1) Definition of "Investment Adviser"

In support of its contention that its activities would

not be those of an "investment adviser" as defined by

§ 202(a) (11) of the Advisers Act, the NSBA pointed out that

while it would be facilitating meetings and information-

sharing between its members and Hutton, informing its members

of the availability of the Trusts, and providing its logo for

use by the Trusts, it would not be advising members as to the

desirabili ty of investing in the Trusts and would not be

providing recommendations, analyses, investment formulas or

investment guidelines or otherwise giving investment advice.

The NSBA stated that it was a long established not-for-profi t

association "in the business" of representing its members,

not "in the business II of advising others as to investments,

and that the development of the Trusts, which it had

undertaken as a service to its members, was only one of many

services it provided for its members. ,,21 "Essentially," said

the NSBA, "a nonprofit organization is providing a service to

its members to meet a perceived need... .The NSBA will not be

recommending that its members participate in the Trusts, but

will be helping bring the opportunity to its members'

attention. Every' sponsor' of a private label fund does no

less and to the best of our knowledge, the staff has not

insisted on their registration as investment advisers. ,,22

We believe that the same analysis is applicable in the

instant case. In other words, for the reasons discussed in

detail at page 11 of this letter, WHS will not be acting as an "investment adviser" as defined by § 202 (a) (11) of the Advisers Act because it will not provide or be "in the

business" of providing investment advice, and will not issue or be to in the business" of issuing analyses or reports concerning securities. WHS' s services under the Agreement

will be restricted to the services of a finder, and those

21 See Feb. 13, 1984 letter, at p.8.
22 Id., at p. 9.

services will constitute only a small part of the services WHS

performs for members of the Association.

( 2 ) Policy
The NSBA also stressed that no policy would be served by

requiring that it register under § 203(a) of the Advisers Act, stating:
"The NSBA--an association of which the

investor is a member and whose interests it

represents--is receiving compensation, which

will be fully disclosed. .. .A registered investment adviser and broker-dealer are responsible for explaining the investment aspects of the (Trust).... The trustees of the Trust are public officials. All aspects of

the Trust and its relation to Hutton and the

NSBA will be fully disclosed. It is difficult to imagine how the "investor" would be benefitted by requiring registration of the

NSBA as an adviser." 23

Similarly, we believe that no policy or purpose would be

served by a requirement that WHS register as an investment

adviser. WHS--a wholly-owned subsidiary of a not-for-profi t

association that has represented the interests of Washington

hospitals for more than 60 years--itself was fOrmed to serve

the interests of Washington hospitals. In bringing to the

attention of Qualifying Hospitals and Affiliates the existence

of a vehicle for investing their funds held in reserve

accounts, WHS will be serving that mission. Moreover, the

Agreement under which WHS will be acting, and its compensation

thereunder, will be fully disclosed. Shares of interest in

the Fund will be offered and sold by the general partner

pursuant to Regulation D under the Securities Act and Sections

460-44A-SOO et seq. of the Washington Act, and the decision to

purchase Shares will be made in each case by persons standing

a fiduciary relationship with the hospital making the investment. Furthermore, a registered investment adviser will manage the invested funds. We do not believe that Qualifying

Hospitals or Affiliates would be benefitted by a requirement

that WHS register as an investment adviser.

Id., at p. 11.

(d) The NSBA' s Contentions Wi th Respect to Rule 206 (4 )-3 Under the Advisers Act: Applicabilitv in

the Instant Case

Wi th respect to Rule 206 (4) -3, the NSBA stated:

"We recognize that Rule 206 (4) -3. . . deals specifically with paYments by an investment adviser to third parties for client solicitation, and that it could be argued that

the NSBA is 'soliciting' clients for Hutton, a

registered investment adviser. . . . (However, the Rule) clearly contemplates a direct contractual relationship between the adviser

and the 'client.' Hutton is the adviser in

this case, but the 'client' of the adviser is

the Trust, not the individual settlor School

Districts. Although the Trust in this case

will not be a registered investment company,

it nevertheless is a legal entity that will

enter into an advisory contract with Hutton.

The Trust is not a device to evade Rule

206(4)-3; it is an entity formed for a

legi timate purpose.
"Thus, in bringing the existence of the

Trust to the attention of its members, the

NSBA is not soliciting 'clients' for Hutton,

the adviser. Although the investors in an

investment company could arguably be

considered to be indirect 'clients' of the

adviser, just as the School Districts could be

in this case, we have seen no indication that

the Commission intended Rule 206 (4) -3 to be applied in that context. 24

We believe that the same analysis is applicable in the

instant case. Dana will be acting as an investment adviser to

the Fund under an investment advisory agreement with the Fund,

and its investment advisory client will be the Fund, not the

individual limited partners. Like the Trust in National

School Boards Association, the Fund is a legal entity formed

for a legitimate purpose, not a device to evade Rule 206(4)-3.

Accordingly, in bringing the existence of the Fund to the

attention of Qualifying Hospitals and Affiliates, WHS will not

be soliciting "clients" for Dana, the investment adviser.

In addition, we believe that no policy would be served by

a decision that WHS should be viewed as a "solicitor" within

Id., at p. 10.

the meaning of Rule 206 (4) -3 under the Advisers Act. The purpose of Rule 206 (4) -3 is to "provide prospective investment

advisory clients with notice of the solicitor's bias and

sufficient information to evaluate that bias. ,,25 WHS has no

"bias" (i. e., no adverse interest) with respect to members of

the Association because (1) it has no mission apart from its

mission to serve their interests, and (2) because all fees

earned by WHS inure to the benefit of members.

For all of the foregoing reasons, we respectfully request: (1)

that the staff of the Division of Market Regulation advise us that

it would not recommend enforcement action to the Commission if the

proposed Agreement is implemented without WHS or its employees

registering as broker-dealers under § 15 (a) of the Exchange Act;

and (2) that the staff of the Division of Investment Management

advise us that it would not recommend enforcement action to the

Commission if the proposed Agreement is implemented without WHS or

its employees registering as "investment advisers" under § 203(a)

of the Advisers Act or proceeding under Rule 206 (4) -3 thereunder. If you have any questions, or if you need further information,

please contact the undersigned at (608) 251-5000. We would

appreciate it if you would notify us orally if it appears that you

will not be able to respond positively to our request so that we

can discuss it further.

Very truly yours,

QUARLES & BRAY
//;;-£6// Ø;2 /(C~ / I- .. t.. ¡;. '_.

Molly K. Martin

52692.01
25 Statement by the staff in Dechert Price and Rhoads t (available Dec. 4, 1990), at p. 7.