SEC Division of Investment Management staff letter: ING Bank N.V.

Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements .

Investment Advisers Act of 1940 - Section 206(4) and Rule 206(4)-3 ING Bank NV

August 31, 2005

RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 2005561159 ING Bank N.V File No. 812-10202

Your letter dated May 5, 2005 requests guidance concerning rule 206(4)-3 under the Investment Advisers Act of 1940 (the "Act"). In essence, you request that we concur with your view that, under the circumstances described in your letter, an investment adviser that is registered or required to be registered with the Commission (an "investment adviser") may pay ING Bank N.V. (the "Settling Firm"), or any of its associated persons, a cash payment for the solicitation of advisory clients (a "cash solicitation fee") consistent with section 206(4) of the Act and rule 206(4)-3 thereunder notwithstanding the Commission administrative order relating to the Settling Firm (the "Commission Order"). 1 The Commission Order instituted and settled an administrative proceeding against the Settling Firm pursuant to section 8A of the Securities Act of 1933 (the "Securities Act"). In the Commission Order, the Commission found that the Settling Firm violated section 5 of the Securities Act, but the Commission did not find that the Settling Firm willfully violated section 5.

Rule 206(4)-3 sets forth the conditions under which an investment adviser may not pay a cash solicitation fee to a person who solicits clients for him. 2 As relevant here, rule 206(4)-3(a)(1)(ii)(C) prohibits an investment adviser from paying a cash solicitation fee, directly or indirectly, to a solicitor: "who has been found by the Commission to have engaged . . . in any of the conduct specified in paragraph[] (5) . . ." of section 203(e) of the Act. The conduct specified in paragraph (5) of section 203(e) of the Act includes any willful violation of the Securities Act. Consequently, for purposes of rule 206(4)-3(a)(1)(ii)(C), a solicitor will have engaged in conduct specified in paragraph (5) only when the solicitor has been found by the Commission to have engaged in a willful violation of, as relevant here, the Securities Act.

Here, the Commission found in the Commission Order that the Settling Firm violated the Securities Act, but did not find that the violation was willful. Accordingly, the prohibition in the rule does not apply, and an investment adviser could pay the Settling Firm, or any of its associated persons, a cash solicitation fee, directly or indirectly, for the solicitation of advisory clients, notwithstanding the Commission Order. We note that the Commission Order provides no other basis for disqualification under rule 206(4)-3. This position applies only to the Commission Order and not to any other basis for disqualification under rule 206(4)-3 that may exist or arise with respect to the Settling Firm or any of its associated persons.

Sara P. Crovitz Senior Counsel

Endnotes

1 Securities Act Release No. 8594 (July 26, 2005).

2 Requirements Governing Payments of Cash Referral Fees by Investment Advisers, Investment Advisers Act Release No. 688 (July 12, 1979).

Incoming Letter

The Incoming Letter is in Acrobat format.

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SULLIVAN & CROMWELL LLP
TELEPHONE: 1-212-558-4000
FACSIMILE: 1-212-558-3588
WWW.SULLCROM COM
LOS ANGELES . PAL0 ALTO. WASHINGTON, D.C
FRANKFURT. LONDON. PARIS
BElJlNG . HONG KONG TOKYO
MELBOURNE. SYDNEY
May 5,2005
Via Facsimile and Federal Express
Douglas J. Scheidt, Esq.,
Associate Director and Chief Counsel,
Division of Investment Management,
U.S. Securities and Exchange Commission,
450 Fifth Street, N.W. Mail Stop 0506,
Washington, D.C. 20549.
Re: In the Matter of ING Bank N.V.
Dear Mr. Scheidt:
We submit this letter on behalf of our client ING Bank N.V. (the "Settling Firm") in connection with a settlement agreement (the "Settlement") with the staff of the Division of Enforcement of the Securities and Exchange Commission (the "Commission"), arising out of an internal review by the Settling Firm regarding the sale of unregistered securities. The Settling Firm, a European bank organized under the laws of the Netherlands, seeks the confirmation of the staff of the Division of Investment Management ("Staff ') that the prohibition in Section 206(4) of the Investment Advisers Act of 1940, or Rule 206(4)-3 thereunder (the "Rule") does not apply to the Settling Firm. BACKGROUND The Settling Firm and the Commission have settled the investigation in connection with the matters described above. In the Settlement, the Commission finds that the Settling Firm violated Section 5 of the Securities Act of 1933 ("Securities Act"), but the Commission makes no finding that such violation was willful. The Settling Firm neither admits nor denies any of the allegations in the Settlement, except as to jurisdiction, but consents to the entry of a cease and desist order against it. The cease and desist order, among other things, orders the Settling Firm to cease and desist from committing or causing any violations of Section 5 of the Securities Act.

EFFECT OF RULE 206(4)-3
The Rule prohibits an investment adviser from paying a cash fee to any solicitor that has been found by the Commission to have willfully violated the Securities Act. Our understanding is that the prohibition in the Rule is not triggered by the Settlement because the Settlement does not contain a finding that the Settling Firm willfully violated Section 5 of the Securities Act. DISCUSSION The Rule's proposing and adopting releases explain the Commission's purpose in including the disqualification provisions in the Rule. The purpose was to prevent an investment adviser from hiring as a solicitor a person whom the adviser was not permitted to hire as an employee, thus doing indirectly what the adviser could not do directly. In the proposing release, the Commission stated that:
[blecause 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.' The Settlement does not bar, suspend, or limit the Settling Firm or any person currently associated with the Settling Firm from acting in any capacity under the federal securities laws.: The Settling Firm has not been sanctioned for activities relating to its activities as an investment adviser or its solicitation of advisory clients.? Accordingly, consistent with the rationale for the Rule articulated by the Commission, there does not appear to be any reason to prohibit an adviser from paying the Settling Firm or its associated persons for engaging in solicitation activities under the Rule. In the release adopting the Rule, the Commission stated that it "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."4 The Staff previously has granted numerous I See Requirements Governing Payments of Cash Referral Fees by Investment Advisers, Inv. Adv. Act Rel. No. 615 (Feb. 2, 1978), 14 S.E.C. Docket (CCH) 89,91. 2 See Requirements Governing Payments of Cash Referral Fees by Investment Advisers, Inv. Adv. Act Rel. No. 688 (July 12, 1979), 17 S.E.C. Docket (CCH) 1293, 1295, at note 10. 3 The Settling Firm additionally notes that it has not violated, or aided and abetted another person in violation of, the Rule, nor have individuals performing solicitation activities on behalf of the Settling Firm been personally disqualified under the Rule. J See footnote 2.

5 requests for no-action relief from the disqualification provisions of the Rule to individuals and entities found by the Commission to have violated a wide range of federal securities laws and rules thereunder and SRO rules or permanently enjoined by courts of competent jurisdiction from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security.' CONCLUSION We respectfully request that the Staff confirm our understanding that, because the Settlement does not contain a finding that the Settling Firm willfully violated the Securities Act,
Section 206(4) of the Investment Advisers Act and Rule 206(4)-3 promulgated thereunder do not
prohibit an investment adviser that is required to be registered with the Commission from paying the Settling Firm, or any of its associated persons, a cash payment for the solicitation of advisory clients. Please do not hesitate to call the undersigned at (212) 558-4837 regarding this request. u Penny Shane See, e.g., Goldman, Sachs & Co., SEC No-Action Letter, 2005 WL 484404 (pub. avail. Feb. 23,2005); Prime Advisors, Inc., SEC No-Action Letter (pub. avail. Nov. 8, 2001); Legg Mason Wood Walker, Inc., SEC No￾Action Letter (pub. avail. June 11, 2001); Dreyfus Corp., SEC No-Action Letter (pub. avail. March 9, 2001); Prudential Securities Inc., SEC No-Action Letter (pub. avail. Feb. 7, 2001); Tucker Anthony Inc., SEC No-Action Letter (pub. avail. Dee. 21, 2000); J.B. Hanauer & Co., SEC No-Action Letter (pub. avail. Dec. 12, 2000); Founders Asset Management LLC, SEC No-Action Letter (pub. avail. Nov. 8, 2000); Credit Suisse First Boston Corp., SEC No-Action Letter (pub. avail. Aug. 24,2000); Janney Montgomery Scott LLC, SEC No-Action Letter (pub. avail. July 18, 2000); Aeltus Investment Management, Inc., SEC No-Action Letter (pub. avail. July 17, 2000); William R. Hough & Co., SEC No-Action Letter (pub. avail. Apr. 13, 2000); In the Matter of Certain Municipal Bond Refundings, SEC No-Action Letter (pub. avail. Apr. 13, 2000); In the Matter of Certain Market Making Activities on Nasdaq, SEC No-Action Letter (pub. avail. Jan. 11, 1999); Paine Webber, Inc., SEC No-Action Letter (pub. avail. Dee. 22, 1998); NationsBanc Investments, lnc., SEC No-Action Letter (pub. avail. May 6, 1998); Morgan Keegan & Co., Inc., SEC No-Action Letter (pub. avail. Jan. 9, 1998); Merrill Lynch, Pierce, Fenner & Smith, Inc., SEC No-Action Letter (pub. avail. Aug. 7, 1997); Gruntal & Co., SEC No-Action Letter (pub. avail. July 17, 1996); Carnegie Asset Management, SEC No-Action Letter (pub. avail. July 11, 1994); Salomon Brothers Inc., SEC No￾Action Letter (pub. avail. Jan. 26, 1994); BT Securities Corporation, SEC No-Action Letter (pub. avail. Mar. 30, 1992); Kidder Peabody & Co. Inc., SEC No-Action Letter (Oct. 11, 1990); First City Capital Corp., SEC No-Action Letter (pub. avail. Feb. 9, 1990); RNC Capital Management Co., SEC No-Action Letter (pub. avail. Feb. 7, 1989); and Stein Roe & Farnham, Inc., SEC No-Action Letter (pub. avail. Aug. 25, 1988).