Facts
Arguments
Comment


On 8 May 2018 the Securities and Exchange Commission (SEC) issued a no-action letter permitting the post-merger survivor of two wholly owned adviser subsidiaries to use the performance record of the non-surviving adviser in the surviving adviser's advertisements.

Facts

South State Advisory, Inc (SSA) and Minis & Co, Inc are two wholly owned registered investment adviser subsidiaries of the same parent company, South State Bank (SSB). To achieve better operational efficiencies, SSB proposed to merge SSA into Minis, with SSA as the merger survivor. Following the merger, Minis would continue as a division of SSA (Minis division), operating under the Minis brand name with appropriate disclosure regarding the post-merger arrangement. In addition, following the merger, the Minis division's management team would be the same as the team that formerly managed Minis. Further, the Minis division's investment committee, consisting of persons responsible for the Minis division's investment decisions and recommendations, would be identical to Minis' investment committee.

Arguments

In its incoming letter, SSB maintained that the SEC's earlier no-action letters – Great Lakes and Horizon(1) – could be read to mean that a successor adviser may use a predecessor's performance record only if the persons principally responsible for the predecessor adviser's record remain at the succeeding adviser, "not just at the time of the succession, but for so long as the successor uses the track record". SSB stated that it was not seeking the SEC's opinion regarding SSB's interpretation of Great Lakes and Horizon, both of which involved a change in control. Instead, SSB emphasised that it was requesting that the Minis division be permitted to continue to use the Minis performance record in its advertisements to the same extent as Minis could have used that record, as if there had been no merger. Thus, SSB maintained that the Minis division could advertise Minis' performance notwithstanding the fact that the composition of the Minis division's management team and investment committee may change over time (although no changes were anticipated in connection with the merger). After all, SSB argued that while there would be a natural evolution of personnel, management, culture and processes at the Minis division over time, the same would have been true had Minis remained a standalone entity.

Comment

The SEC provided the requested no-action assurances. While those assurances arguably were implicit in Great Lakes, Horizon and various reorganisation no-action letters involving an adviser (deemed not to result in a change in control of the adviser), the SSB no-action letter clarifies the permissible advertising portability in a situation involving a cleaner set of facts. Critically, in a footnote to the no-action letter, the SEC noted that the "positions expressed in the [Great Lakes and Horizon] no-action letters continue to represent the staff's positions with respect to the circumstances presented therein".

For further information on this topic please contact Brian D McCabe at Ropes & Gray LLP's office by telephone (+1 617 951 7000) or email ([email protected]). The Ropes & Gray website can be accessed at www.ropesgray.com.

Endnotes

(1) Great Lakes Advisors, Inc, SEC No-Action Letter (pub avail 3 April 1992) and Horizon Asset Management, LLC, SEC No-Action Letter (pub avail 13 September 1996).