Defining “Qualified Client” – Uff Da!

by Allen Matkins
Contact

Corporations Code Section 25234 generally prohibits an investment adviser registered in California to be compensated on the basis of a share of capital gains. This prohibition is analogous to the prohibition found in Section 205(a)(1) of the Investment Advisers Act of 1940 (IAA). Congress included this prohibition because it was believed that performance fees might induce advisers in search or higher fees to take unwarranted risks with their clients’ funds. The Commissioner has adopted a rule that provides several exceptions, Rule 260.234. For example, an investment adviser is excepted when, among other things, the only clients entering into the investment advisory contract are “qualified clients”. Today, I’m focusing not on the exemption, but on the complexity of the definition.

The Commissioner’s rule defines “qualified clients” by reference to a federal regulation, Rule 205-3 under the IAA. The federal rule defines “qualified client” as, among others, a person who is a “qualified purchaser” as defined in Section 2(a)(51)(A) of yet another act, the Investment Company Act of 1940 (ICA). As an initial matter, it is important to recognize that the definition of “qualified purchaser” in Rule 260.234 is not the same as that found in Corporations Code Section 25102(n)(2).

Now, the statutory definition of “qualified purchaser” is no easy matter. It incorporates other terms defined in the ICA, including “company” (§ 2(a)(8)), “issuer” (§ 2(a)(22)) and “person” (§ 2(a)(28)). In addition, the Securities and Exchange Commission has adopted a rule under the ICA, Rule 2a51-1, that defines “investments” for purposes of the statute. That rule includes 10 separate definitions. Rule 2a51-1 also makes reference to a term defined in Rule 144A under the Securities Act of 1933 (Securities Act) - “qualified institutional buyer”. That rule refers to yet more acts, including the Securities Act, the ICA, the Small Business Investment Act of 1958 (SBIA), the Employee Retirement Income Security Act of 1974 (ERISA), the IAA, and the Securities Exchange Act of 1934. The SEC has adopted yet another rule, Rule 2a51-2, defining “beneficial owner” for purposes of the statute.

Rule 205-3 also employs its own set of definitions for defining “qualified purchaser” - “company” and “executive officer”. The definition of “company” leads you yet another statute – Section 202(a)(5) of the IAA. Moreover, it requires an understanding of who is required to be registered under the ICA.

The bottom line is that to understand the exemption in Rule 260.234, one must take into account at least 30 defined terms, including 14 terms defined by statutes in 6 separate federal acts (the IAA, ICA, SA, SBIA, SEA and ERISA) and 16 terms defined in federal rules adopted under at least 3 different federal acts (the IAA, ICA and SA).

In drafting this blog, I was tempted to refer to the complexity of the definition as “extraordinary”. Unfortunately, this level of complexity is not extraordinary, it is typical.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Allen Matkins | Attorney Advertising

Written by:

Allen Matkins
Contact
more
less

Allen Matkins on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!