SEC Division of Investment Management staff letter: Horizon Asset Management, LLC

SEP I 3 1996

Our Ref. No. 96-309

REPONSE OF TI OFFICE OF CIDEF COUNSEL Horion Asset Managemen~t, LLC

DIVISION OF INVESlMNT MANAGEM File No. 801-50502 Your letter of June 3, 1996 requests our assurace that we would not recommend enforcement action to the Commission under section 206 of the Investment Advisers Act of 1940 (the "Advisers Act") or rule 206(4)-1 thereunder if Horion Asset Management, LLC ("Horion"), a registered investment adviser, includes in its advertisements performance data

reflecting the performance achieved by an investment adviser previously owned and operated by one of Horion's managers.

You state that Horion wil manage accounts using a three-person advisory committee. You represent that one of the members of the committee (the "Controllg Manager") wil make al investment decisions with respect to Horion's accounts, and that the other committee members wil only advise the Controllg Manager prior to his makg these decisions. You state that, notwithstading the other committee members, the Controllg Manager wil have final decision-makng authority over the investment portfolios. The Controllg .Manager previously owned and operated another registered investment adviser (the "Predecssor Fir"). You represent that the Controllg Manager was pricipaly responsible for al investment decisions made by that finn. Horion proposes to advertise the composite perfonnance of al the Predecssor Fir's accunts that had the same investment objectives and were managed using the sae investment strategies as accounts that Horion wil manage. You reresent that Horin wil make appropriate disclosures to potential clients, includig disclosure relatig to the source of the results, and that Horion wil keep those books and recrds of the Predecssor Fir that are necessar to substatiate the performance results, :i accrdace with rule 204-2(a)(16) under the Advisers i Ace
Section 206(4) of the Advisers Act prohibits an investment adviser from engagig in
any act, practice, or course of business that the Commission, by rule, defies as fraudulent, deceptive, or manpulative. Rule 206(4)-1(a)(5) under the Advisers Act provides that it is a fraudulent, deceptive or manpulative act for any investment adviser to distribute, directly or indirectly, any advertisement that contas any untrue statement of material fact or that is otherwise false or misleading. ITelephone conversation of-August i4, 1996 between Rochelle Kauffman Plesset and Robert J. Ahenholz, counsel to Horiôn. Rule 204-2(a)(16) generay reuirs an investment adviser to keep all documents that are nécssar to form the basis for or demonstrate the calculation of the performance or rate of return of managed accounts that is included in advertisements. Ths requirement also applies to the use by an investment adviser of a predecessor's performance data. Great Laes Advisors (pub. avail. Apr. 3, 1992). Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for more information:
https://www.sec.gov/divisions/investment/im-modified￾withdrawn-staff-statements

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  The staff taes the position that an investment adviser advertisement that inclùdes

prior performance results of accounts managed by a predecessor entity would not, in and of itself, be misleading under rule 206(4)-1(a)(5) provided that (1) the person or persons who manage accounts at the adviser were also those priariy responsible for achieving the prior performance results,2 (2) the accounts managed at the predecssor entity are so similar to the accounts currently under management that the performance results would provide relevant inormation to prospective clients, (3) al accounts that were managed in a substatialy similar maner are advertsed unless the exclusion of any such account would not result in materiy higher performance,3 (4) the advertisement is consistent with staf interpretations with respect to the advertsement of performance results,4 and (5) the advertisement includes al relevant disclosures, including that the performance results were from accounts managed at another entity. The priar issue rased by your request relates to the first factor noted above:
whether Horion may use the Predecssor Fir's performance results notwithstading that the Controllg Manager is par of an advisory committee at Horion. You assert that, even though the Controllg Maiager wil be a member of Horion's advisory committee,

Horion's use of the Predecessor Fir's performance results would not be misleading

because the same person who was pricipaly responsible for investment decisions at the Predecessor Fin also wil be pricipaly responsible for such decisions at Horion.

The staf has taen the position that it may be misleading for an adviser to advertise the peiformance results of accounts managed at an employee's prior place of employment when the employee had been one of severa persons responsible for selecting the securities for those accounts.s Conversely, it may be misleading for an employee's new finn to use the performance results of an accunt he previously managed if at the new finn the manager is one of severa persons responsible for managig accounts. In this case, however, the fact that the Controllg Manager wil be a member of an advisory committee does not

2See, e.g., Bramwell Growth Fund (pub. avai. Aug. 7, 1996); Conway Asset Management, Inc. (pub. avail. Jan. 27, 1989). . 3The staf previously had taen the position that it may not be misleading to exclude the performance of accounts if the performance results of the omitted accounts are not materialy different from the results of the accunts that are to be advertised. E.g., Conway Asset Management, Inc. The sta is clarying this position in light of a letter issued recntly to an adviser that wished to use performance that reflected the deduction of a model fee when the resulting performance figures would be.. no higher than those that would have resulted had actual fees been deducted. See J.P. Morgan Investment Management, Inc. (pub. avai. May 7, 1996). . . 4See, e.g., Clover Capital Management, Inc. (pub. avail. Oct. 28, 1986). SGreat Laes Advisors, Inc.

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  necessarily mean that including the Predecessor Firm's performance results in an advertisement would be misleading, if the Controlling Manager is the person actually responsible for makg the investment decisions, and those decisions nee not be made with the consensus of the other members of the committee. Accordingly, based on the facts and representations set forth in your letter and described above, we would not recommend enforcement action to the Commission under
  section 206 of the Advisers Act or rule 206(4)-1 thereunder if Horion includes performance
  data of the Predecessor Fir in its advertsements, provided that the advertisements are not

otherwise false or misleading. Becuse this response is based on the facts and representations in your letter, you should note that any diferent facts or representations might lead to a different conclusion. if~ r~ p~ Rochelle Kauffman Plesset Senior Counsel

KUTAK ROCK

A PARTNERSHIP
INCLUDING PROFESSIONAL CORPORATiONS ATLANTA
K.ANSAS eii y SUITE 2900 .
LITTLE ROCK 7 i 7 SEVENTEENTH STREET NEw YORK

DENVER. COLORADO 80202.3329 " OKLAHOMA CITY

OMAHA
PHOENIX 303-297-2400 ~
PITTSBURGH FACSIMILE 303-292-7799
WASHINGTON
Investment Advisers Act of 194Ò/Section 206(4) Rule 206(4)-1 June 3, 1996

Mf-
. Division of Investment Management
Securities and Exchange Commission
.flLm_dOl,. ~

1a_ ~

Office of Chief Counsel

450 Fifth Street, N.W. .
Washington, D.C. 20549
~1I'~../ 7:(.
Attention: Rochelle Kaufman Plesset, Esq.
Re: Horizon Asset Management, LLC

Ladies and Gentlemen:

We are counsel to Horizon Asset Management, LLC ("Horizon") which has recently registered as an Investment Adviser under the Investment Advisers Act of 1940 ("the Act"). Horizon has requested that we obtain the advice of the staff (the "Staff") of the Securities 3.nd Exchange Commission (the "Commission") as to whether the Staff will recommend the Commission take any enforcement action under the Act, particularly Section 206 and Rule 206(4)- 1 promulgated thereunder, against Horizon by virte of its'use of performance data from an investment adviser previously owned and operated by one of Horizon's managers, as described below. This letter supersedes and replaces our letter to you dated May 7, 1996 concerning this matter. Background Horizon was formed as a limit-td liability company under Colorado law on April ~O,
1996. Horizon's application on Form ADV with the Commission was effective May 20, 1996.
It is proposed that an advisory committee (the "Committee") for Horizon wil consist of three persons. One of the members of the Cornittee (thè "Controlling Manager") will be solely O~/i02034.3

KUTAK ROCK

Securities and Exchange Commission
June 3, 1996

Page :2'
responsible for all investment decisions of the Committee. The other two members of the Committee will have various responsibilities with respect to Horizon, including providing advice to the Controllng Manager with regard to portfolio management. The Controlling Manager will have final decision making authority and the ability to manage investment portfolios

notwithstanding any advice pro,vided by the other members of the Committee. The Controllng Manager previously owned and operated an investment adviser (the "Predecessor Firm ") unaffiliated with Horizon. While employed by the Predecessor Firm, the Controlling Manager was substantially responsible for all investment decisions made by that firm. The Controlling Manager, though the responsibilities described above, will be in substantially the s"ame position while employed by Horizon. Horizon will use the same investment strategies and has the same investment objectives as the Predecessor Firm. Horizon propose~ to' include the investment performance results of the Predecessor Firm in connection with certain of its advertisements. In regard to such use, Horizon will make appropriate disclosure to potential investors under the Act as to the source of such results. Analysis The Staff has previously taken the position that. under various circumstances the

performance results of a prior firm may be provided to prospective clients of a subsequent investment adviser. Taurus Advisory Group, Inc. (pub. avaiL. July 15, 1993); Conway Asset Management (pub; avaiL. January 27, 1989) ("Conway"); Growth Stock Outlook Trust, Inc. (pub. avaiL. April 15, 1986). In Conway, the Staff took the position that the use of prior performance results of a predecessor advisor by a subsequent investnent adviser would not be misleading if: 1) no individual or entity other than the individual at issue played a significant
part in the performance of the previous investment adviser's accounts and 2) the results of the
accounts to be advertised were not materially different from the r~sults of those accounts which did not become part of the subsequent adviser. Although there was no controllng manager situation in Conway, the relevant circumstances of Horizon are substantially identical to those presented in Conway. No individual other than the Controllng Manager played a significant part in the performance of Predecessor Firm's accounts and, by virte of the responsibilities described above, the Controllng Manager wil control investment decisions made by Horizon~ Further, Horizon does not seek to advertise results of prior accounts which are materially different from those to be advertised. 02/102034.3

KUTAK ROCK
Securities and Exchange Commission
June 3, 1996

Page. :3
We do not believe that the analysis in Great Lakes Advisors, Inc. (pub. avaiL. April 3,
1992) is applicable since in that case the investment decisions of the predecessor advisor were
made by a committee of three or four persons where the person changing positions did not have the power on such committee that the Controlling Manager will have on Horizon's Committee. It is our opinion that, to the extent Horizon uses an "advertisement" (as defined in

Rule 206(4)- 1 (b)) in connection with providing the past performance results of the Predecessor Firm, such information would not, in and of itself, be false or misleading under Rule 206(4) l(a)(S). Because the past performance results are based on the Controlling Manager's efforts

and the Controllng Manager will continue those efforts at Horizon, clients of Horizon will not be mislead by having the past performance results available. In this regard, because the Controllng Manager owned the Predecessor Firm, the Controllng Manager will have access to the necessary books and records to ensure the accuracy of the past performance results. Request for Advice

Under the circumstances described above, we request advice from the Staff on behalf of Horizon whether enforcement action would be recommended to the Commission under the Act if Horizon were to advertise performance results of the Predecessor Firm. If you have any questions or comments, please do not hesitate to contact the undersigned. Sincerely yours, '/) ~7 j-l~,J-i-'-lL I . -U.¿t. i f! L ,

Robert J. Ahrenholz st
02/102034_3