SEC Division of Investment Management staff letter: George Colman

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f&!y-r. "/?/) 1 Jl~3 SECURITIES AND EXCHANGE COMMISSION IF" l .. !"" ~ ~~. ¡, .i")"", ,"'co, V ~ ....AlXø,... WASHINGTON. D.C. 20549 .ION OF

VES,. _.,T MANAGEMENT
July 18, 1995

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44 Fox Hil Road
¡~eet1on Framingham, Massachusetts 01701 ~ ç(tL) (() ::.'~,D. ~ . RE: Refund of Advisory Fees ''.bl1c' ~,,~,'¡''' 7/1 g Dea Mr. Colman: :'::2.1,~biU ty I1Ç' 1 ~iil'R-~t .i'--..;.l.l~.,M~'.....i~~I,,::'_.;~:,'" I am writing in response to your letter of June 27, 1995. You state in your letter that you recently terminated a contract with an investment adviser because of poor performance, and requested that the adviser refund the advisory fee. You state that the adviser refuses to refund the fee on the basis that the Investment Advisers Act of 1940 ("Advisers Act") prohibits fee waivers related to the performance of an account. You question the adviser's reasonig and ask whether the Advisers Act actualy precludes hi from returng advisory fees.
Section 205(a)(I) of the Advisers Act prohibits a registered investment adviser from
enterig into an investment advisory contract that provides for compensation on the basis of

a share of the capital gais or capita appreciation in a client's account. The staff of the Commission has interpreted this section to prohibit investment advisers from enterig into contingent advisory fee argements, such as agreements under which fees are waived or

refunded if a client's account does not meet a specifed level of performance. 1/ :l e:
We believe, however, that the Advisers Act does not prohibit a volunta, non contractual refund of advisory fees by an investment adviser. You state that your contract with the adviser does not in any maner base advisory fees on the adviser's performance.

Assuming you had no other understading with the adviser regarding a fee refund or waiver related to investment performance, the return of your advisory fees would not be prohibited. Of course, an adviser is not obligated under the Advisers Act to refund fees for advisory services actualy rendered. An adviser, however, is generally required to return advisory fees that were prepaid for periods afer the termination of the contract. I hope the information discussed above is usefuL. If you have additional questions, you may contact us at (202) 942-0660. Sincerely, r " \ '_'. _ -:'-. . ,.i.'.Y',....( i .-~""~'~- J'~' '~J- ..'-- ~.. .. , _ Barbara Chretien-Dar Senior Counsel 1/ See Investment Advisers Act Release No. 721 (May 16, 1980) .:":,

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GEORGE COLMAN RULE
44 FOX HILL ROAD PUBLIC FRAMINGHAM, MA 01701 USA A V AIL ABILIT -t - l 8 - -1 ,~' TELEPHONE (508) 872-9087

TELEFAX (508) 879-4031

INVSTMENT ADVISORS, INTERPRETIVE MATTERS
June 27, 1995

U. S. Securities & Exchange Commission

450 5th Street, NW

Washington, DC 20549 FAX # 202-942-9659

ATTENTION: Chief Counsel
Dear Sir:
I signed an investment advisory contract in August of 1993 that

provided for discretionary management of my account, along with

quarterly advisory fee withdrawals. The contract did not in any way connect advisory fees to the advisor i s performance. I terminated the contract on May 3 because of poor performance

by the advisor and, on May 31, I asked for a fee refund, which

he refuses to give me. His reason is that he "must adhere to

the Investment Advisors Act of 1940, which clearly states that

we cannot waive fees based on performance related matters."

In my opinion, a more complete and appropriate extract from the

Act would be, "Section 205 (1) generally prohibits an investment

~ advisor from being a party to any advisory contract which makes ~ advisory fees contingent on investment performance." Further, Sec. 205 (1) expressly applies ~ to compensation arrangements based upon a share of capital gains or appreciation of the funds of an advisory client. As I stated above, the contract I signed made no connection between advisor performance and advisory fees and a fee refund subsequent to the terminated contract could not create a "conflict of interest," which is what Sec. 205 (1) seeks to avoid. Al though the contract I signed clearly permi ts him to keep the

fees, I believe the Investment Advisors Act of 1940 does not in

any way preclude him from returning the fees if he believesit

is morally correct to do so. May I tell him that the SEe would

not see a problem if he chooses to return my fees?

I welcome your early reply since I am right now discussing this

issue wi th the advisor.

Sincerely i heN C~
George Colman