* See Investment Advisers Act Release No. 1682 (Nov. 13, 1997).
[9441]
November 21, 1997
TO: CLOSED-END INVESTMENT COMPANY COMMITTEE No. 48-97
SEC RULES COMMITTEE No. 114-97
RE: SEC PROPOSES AMENDMENTS TO PERFORMANCE FEE RULE
______________________________________________________________________________
The Securities and Exchange Commission has issued a release proposing amendments
to Rule 205-3, the rule that permits investment advisers to charge certain clients performance
fees (copy attached).* The proposed amendments would eliminate Rule 205-3s provisions that
specify required contract terms and disclosures. In addition, the amendments would increase
the current criteria for clients eligible to enter into performance fee arrangements. Under the
proposed amendments, to be eligible a client would be required to have assets under
management with the adviser of at least $750,000 or net worth of more than $1,500,000. (The
current requirements are $500,000 and $1,000,000 respectively). The proposed increases are
intended to reflect the effects of inflation on the dollar figures in the rule, not to reduce the
number of or to alter the types of clients with which an adviser may enter into a performance
fee arrangement. Further, the proposed amendments would add as a new category of eligible
client "qualified purchasers," as defined in section 2(a)(51)(A) of the Investment Company Act
of 1940.
The proposed amendments raise one issue of particular interest to investment
companies. Rule 205-3 currently provides that with respect to certain clients entering into
performance fee contracts with an adviser -- private investment companies, registered
investment companies, and business development companies -- the adviser must "look
through" the legal entity to determine whether each equity owner of the company would satisfy
the new eligibility criteria ("qualified client"). The proposed amendments would retain the
"look-through" provision and clarify that any equity owners that are not charged a performance
fee would not be required to meet the qualified client test. The proposed amendments would
retain the provision in Rule 205-3 that an equity owner who is the investment adviser entering
into the performance fee contract need not be a qualified client. Comment is requested on whether
this "look-through" provision should continue to be included in rule 205-3. Comment also is requested
on whether the rule should specifically address the application of the "look through" provision to other
entities.
Comments are due to the SEC on the proposed amendments by January 20, 1998. Please
provide me with comments on the proposed amendments by December 10, 1997. You can reach
me by phone at 202/326-5821, fax at 202/326-5827, or e-mail at donohue@ici.org.
Dorothy M. Donohue
Associate Counsel
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