Current through Register Vol. 41, No. 3, September 23, 2024
A. In
accordance with § 13.1-503C of the Act, an investment advisor may enter
into, extend, or renew any investment advisory contract to provide for
compensation to the investment advisor on the basis of a share of the capital
gains upon, or the capital appreciation of, the funds or any portion of the
funds of a client, provided that the following conditions of this section are
satisfied.
B. Nature of the client:
1.
a. The
client entering into the contract subject to this section must be a natural
person or a company, as defined in subdivision 2 of this subsection and in the
definition of "company" in subsection E of this section, who immediately after
entering into the contract has at least $1 million under the management of the
investment advisor; or
b. A person
who the registered investment advisor (and any person acting on his behalf)
entering into the contract reasonably believes, immediately prior to entering
into the contract, is a natural person or a company, as defined in subdivision
2 of this subsection and in the definition of "company" in subsection E of this
section, whose net worth at the time the contract is entered into exceeds $2
million. (The net worth of a natural person may include assets held jointly
with such person's spouse.)
2. The term "company" as used in subdivision
1 of this subsection does not include:
a. A
private investment company, as defined in subsection E of this
section;
b. An investment company
registered under the Investment Company Act of 1940; or
c. A business development company, as defined
in § 202(a)(22) of the Investment Advisers Act of 1940 ( 15 USC § 80b
- 2(a)(22))
unless each of the equity owners (other than the investment
advisor entering into a contract under this section) of any such company
identified in subdivision 2 of this subsection, is a natural person or company
described in this subsection.
C. Disclosure. In addition to the disclosure
requirements of Form ADV, the advisor shall disclose to the client, or the
client's independent agent, prior to entering into an advisory contract
permitted by this section, all material information concerning the proposed
advisory arrangement including the following:
1. That the fee arrangement may create an
incentive for the advisor to make investments that are riskier or more
speculative than would be the case in the absence of a performance
fee;
2. Where relevant, that the
advisor may receive increased compensation with regard to unrealized
appreciation as well as realized gains in the client's account;
3. The time period which will be used to
measure investment performance throughout the term of the contract and its
significance in the computation of the fee;
4. The nature of any index which will be used
as a comparative measure of investment performance, the significance of the
index, and the reason the advisor believes the index is appropriate;
and
5. Where an advisor's
compensation is based on the unrealized appreciation of securities for which
market quotations are not readily available, how such securities will be valued
and the extent to which the valuation will be independently
determined.
D.
Arm's-length contract. The investment advisor (and any person acting on its
behalf) who enters into the contract must reasonably believe, immediately prior
to entering into the contract, that the contract represents an arm's-length
arrangement between the parties and that the client (or in the case of a client
which is a company as defined in subsection E of this section, the person
representing the company), alone or together with the client's independent
agent, understands the proposed method of compensation and its risks. The
representative of a company may be a partner, director, officer, or an employee
of the company or the trustee, where the company is a trust, or any other
person designated by the company or trustee, but must satisfy the definition of
client's independent agent set forth in subsection E of this section.
E. Definitions. For the purpose of this
section:
The term "affiliated person" has the same meaning as in
§ 2 (a)(3) of the Investment Company Act of 1940 ( 15 USC § 80a -
2(a)(3)).
The term "client's independent agent" means any person
agreeing to act as the client's agent in connection with the contract other
than:
1. The investment advisor acting
in reliance upon this section, an affiliated person of the investment advisor,
an affiliated person of an affiliated person of the investment advisor, or an
interested person of the investment advisor as defined in this
subsection;
2. A person who
receives, directly or indirectly, any compensation in connection with the
contract from the investment advisor, an affiliated person of the investment
advisor, an affiliated person of an affiliated person of the investment advisor
or an interested person of the investment advisor as defined in this
subsection; or
3. A person with any
material relationship between himself (or an affiliated person of such person)
and the investment advisor (or an affiliated person of the investment advisor)
that exists, or has existed at any time during the previous two
years.
The term "company" has the same meaning as in § 202
(a)(5) of the Investment Advisers Act of 1940 ( 15 USC § 80b - 2(a)(5)
).
The term "interested person" as used in the definition of
"client's independent agent" of this section means:
1. Any member of the immediate family of any
natural person who is an affiliated person of the investment advisor;
2. Any person who knowingly has any direct or
indirect beneficial interest in, or who is designated as trustee, executor, or
guardian of any legal interest in, any security issued by the investment
advisor or by a controlling person of the investment advisor if the beneficial
or legal interest of the person in any security issued by the investment
advisor or by a controlling person of the investment advisor:
a. Exceeds one tenth of one percent of any
class of outstanding securities of the investment advisor or a controlling
person of the investment advisor; or
b. Exceeds 5.0% of the total assets of the
person (seeking to act as the client's independent agent); or
3. Any person or partner or
employee of any person who at any time since the beginning of the last two
years has acted as legal counsel for the investment
advisor.
The term "private investment company" means a company which
would be defined as an investment company under § 3 (a) of the Investment
Company Act of 1940 ( 15 USC § 80a - 3(a)) but for the exception provided
from that definition by § 3 (c)(1) of such Act.
The term "securities for which market quotations are
readily available" in subsection C of this section has the same meaning as in
Rule 2a-4 (a)(1) under the Investment Company Act of 1940 ( 17 CFR 270.2 a-
4(a)(1)).
The term "securities for which market quotations are not
readily available" in subsection C of this section means securities not
described in the above paragraph.
Statutory Authority: §§ 12.1-13 and 13.1-523.1
of the Code of Virginia (21VAC5-20-85,
21VAC5-20-155) .
§§ 12.1-13 and 13.1-523 of the Code of Virginia
(21VAC5-20-280,
21VAC5-45-20,
21VAC5-80-130,
21VAC5-80-200,
21VAC5-80-220).
§§ 12.1-13 and 13.1-514 of the Code of Virginia
(21VAC5-40-190
).
