Section 710 IAC 4-9-10 - Performance based compensation exemptionAuthority: IC 23-19-6-5
Affected: IC 23-19-5-2
Sec. 10.
(a) As used in this section, "affiliated person" has the meaning set forth in Section 2(a)(3) of the federal Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(3)) .(b) As used in this section, "client's independent agent" means any person who agrees to act as an investment advisory client's agent in connection with the contract but does not include any of the following:(1) The investment adviser relying on this section.(2) An affiliated person of the investment adviser or an affiliated person of an affiliated person of the investment adviser including an investment adviser representative.(3) An interested person of the investment adviser.(4) A person who receives, directly or indirectly, any compensation in connection with the contract from: (A) the investment adviser;(B) an affiliated person of the investment adviser;(C) an affiliated person of an affiliated person of the investment adviser; or(D) an interested person of the investment adviser.(5) A person with any material relationship between himself or herself, or an affiliated person of that person, and the investment adviser, or an affiliated person of the investment adviser, who exists or has existed at any time during the past two (2) years.(c) As used in this section, "company" means:(4) a joint stock company;(6) any organized group of persons, whether incorporated or not;(8) a trustee in a case under Title 11 of the United States Code;(9) a similar official; or(10) any liquidating agent for any of the foregoing, in his or her official capacity. The term does not include a company required to be registered under the federal Investment Company Act of 1940 but which is not so registered, a private investment company that is a company that would be defined as an investment company under Section 3(a) of the federal Investment Company Act of 1940 (15 U.S.C. 80a-3(a)) but for the exception from that definition provided by Section 3(c)(1) of that Act (15 U.S.C. 80a-3(c)(1)) , an investment company registered under the federal Investment Company Act of 1940, or a business development company as defined in Section 202(a)(22) of the federal Investment Adviser Act of 1940 (15 U.S.C. 80b-2(a)(22)) , unless each of the equity owners of any business development company, other than the investment adviser entering into the contract, is a natural person or company as defined under this subsection.
(d) As used in this section, "interested person" means any of the following:(1) Any member of the immediate family of any natural person who is an affiliated person of the investment adviser.(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 adviser or by a controlling person of the investment adviser if that beneficial or legal interest exceeds:(A) one-tenth of one percent (.1%) of any class of outstanding securities of the investment adviser or a controlling person of the investment adviser; or(B) five percent (5%) of the total assets of the person seeking to act as the client's independent agent.(3) Any: (C) employee; of any person who, at any time since the beginning of the last two (2) years, has acted as legal counsel for the investment adviser.
(e) Notwithstanding IC 23-19-5-2(c), an investment adviser may:(3) renew; an investment advisory contract that provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds of the client if the conditions of subsections (f) through (k) are met.
(f) The client entering into the contract must be either of the following:(1) A natural person or a company who immediately after entering into the contract has at least five hundred thousand dollars ($500,000) under the management of the investment adviser.(2) A person who the investment adviser and its investment adviser representatives reasonably believe, immediately before entering into the contract, is a natural person or a company whose net worth, at the time the contract is entered into, exceeds one million dollars ($1,000,000). The net worth of a natural person may include assets held jointly with that person's spouse.(g) The compensation paid to the investment adviser with respect to the performance of any securities over a given period must be based on a formula with the following characteristics: (1) In the case of securities for which market quotations are readily available, within the meaning of Rule 2a-4(a)(1) under the Investment Company Act of 1940 (17 CFR 270.2a-4(a)(1)) , Definition of "Current Net Asset Value" for Use in Computing Periodically the Current Price of Redeemable Security), the formula must include the realized capital losses and unrealized capital depreciation of the securities over the period.(2) In the case of securities for which market quotations are not readily available, within the meaning of Rule 2a-4(a)(1) under the Investment Company Act of 1940 (17 CFR 270.2a-4(a)(1)) , the formula must include the following: (A) The realized capital losses of securities over the period.(B) If the unrealized capital appreciation of the securities over the period is included, the unrealized capital depreciation of the securities over the period.(3) The formula must provide that any compensation paid to the investment adviser under this rule is based on the gains less the losses, computed under this subsection, in the client's account for a period of not less than one (1) year.(h) Before entering into the advisory contract and in addition to the requirements of Form ADV, the investment adviser must disclose in writing to the client or the client's independent agent all material information concerning the proposed advisory arrangement, including the following:(1) That the fee arrangement may create an incentive for the investment adviser to make investments that are riskier or more speculative than would be the case in the absence of a performance-based fee.(2) Where relevant, that the investment adviser may receive increased compensation with regard to unrealized appreciation as well as realized gains in the client's accounts.(3) The periods that will be used to measure investment performance throughout the contract and their potential significance in the computation of the fee.(4) The following concerning indexes:(A) The nature of any index that will be used as a comparative measure of investment performance.(B) The potential significance of the index.(C) The reasons the investment adviser believes that the index is appropriate.(5) Where the investment adviser's compensation is based in part on the unrealized appreciation of securities for which market quotations are not readily available, within the meaning of Rule 2a-4(a)(1) of the Investment Company Act of 1940 (17 CFR 270.2a-4(a)(1)) , how the securities will be valued and the extent to which the valuation will be independently determined.(i) The investment adviser, and any investment adviser representative, who enters into the contract must reasonably believe, immediately before entering into the contract, the following: (1) The contract represents an arm's length arrangement between the parties.(2) The client or, in the case of a client that is a company as defined in subsection (c), 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:(D) 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 (b).
(j) Nothing in this section shall relieve a person entering into or performing an investment advisory contract from any obligations under IC 23-19-5-2 or any other applicable provision of IC 23-19.(k) Nothing in this section shall relieve a client's independent agent from any obligations to the client under applicable law. Securities Division; 710 IAC 4-9-10; filed Jun 28, 2010, 2:36 p.m.: 20100728-IR-710100044FRAReadopted filed 5/12/2016, 1:47 p.m.: 20160608-IR-710160136RFAReadopted filed 11/30/2022, 4:01 p.m.: 20221228-IR-710220301RFA