February 9, 1989
TO: INVESTMENT ADVISERS COMMITTEE NO. 10-89
RE: INSTITUTE COMMENTS ON PROPOSED NEW JERSEY PERFORMANCE FEE
RULE
__________________________________________________________
On February 1, 1989, the Institute submitted a comment
letter to the New Jersey Securities Commissioner concerning a
proposed performance fee rule. A copy of both the proposed rule
and our letter are attached. In our letter, we generally agreed
with the concept of permitting performance-based compensation
agreements between investment advisers and their clients.
However, we noted that the SEC and a number of other states have
already adopted rules in this area. We recommended that New
Jersey's proposed rule be coordinated and consistent with those
rules and recommended changes to affect that goal.
Specifically, we recommended that the New Jersey proposal
permit performance fee arrangements with clients who have either
$500,000 or more to place with an investment adviser or a net
worth of $1 million. New Jersey's proposed rule would require
that an investment adviser client have both $500,000 to place
with an investment adviser and a net worth of $1 million.
In our second comment, we recommended the deletion of a
requirement that would exclude certain personal items from the
net worth test for an individual. We stated that such a
requirement was inconsistent with other state rules and with the
SEC rule. At a minimum, we urged the Securities Commissioner to
delete the provision that would exclude a farm from an
individual's net worth. We stated that we could not understand
why a wealthy farmer would be considered to be necessarily less
sophisticated than a wealthy industrialist.
Finally, we commented that we did not believe that an
individual who, as an independent agent of a client, assists a
client in negotiating a performance fee arrangement should be in
required to register as an investment adviser simply because of
that assistance. Therefore, we recommended that the Securities
Commissioner delete the provision found in subrule (D).
We will continue to keep you advised of developments in New
Jersey.
Robert L. Bunnen, Jr.
Assistant General Counsel
Attachment