SECTION
205 OF THE INVESTMENT ADVISERS ACT OF 1940
15
U.S.C. § 80b-5 (1988)
(a) No
investment adviser, unless exempt from registration pursuant to section
80b-3(b) of this title, shall make use of the mails or any means or
instrumentality of interstate commerce, directly or indirectly, to enter into,
extend, or renew any investment advisory contract, or in any way to perform any
investment advisory contract entered into, extended, or renewed on or after
November 1, 1940, if such contract-
(1)
provides for compensation to the investment adviser on the basis of a share of
capital gains upon or capital appreciation of the funds or any portion of the
funds of the client;
(2)
fails to provide, in substance, that no assignment of such contract shall be
made by the investment adviser without the consent of the other party to the
contract; or
(3)
fails to provide, in substance, that the investment adviser, if a partnership,
will notify the other party to the contract of any change in the membership of
such partnership within a reasonable time after such change.
(b)
Paragraph (1) of subsection (a) of this section shall not-
(1) be
construed to prohibit an investment advisory contract which provides for
compensation based upon the total value of a fund averaged over a definite
period, or as of definite dates, or taken as of a definite date;
(2)
apply to an investment advisory contract with-
(A) an
investment company registered under subchapter I of this chapter or,
(B) any
other person (except a trust, governmental plan, collective trust fund, or
separate account referred to in section 80a-3(c)(11) of this title), provided
that the contract relates to the investment of assets in excess of $1 million,
if the contract provides for compensation based on the asset value of the
company or fund under management averaged over a specified period and
increasing and decreasing proportionately with the investment performance of
the company or fund over a specified period in relation to the investment
record of an appropriate index of securities prices or such other measure of
investment performance as the Commission by rule, regulation, or order may
specify; or
(3)
apply with respect to any investment advisory contract between an investment
adviser and a business development company, as defined in this subchapter, if
(A) the compensation provided for in such contract does not exceed 20 per
centum of the realized capital gains upon the funds of the business development
company over a specified period or as of definite dates, computed net of all
realized capital losses and unrealized capital depreciation, and the condition
of section 80a‑60(a)(3)(B)(iii) of this title is satisfied, and (B) the
business development company does not have outstanding any option warrant, or
right issued pursuant to section 80a-60(a)(3)(B) of this title and does not
have a profit-sharing plan described in section 80(a)-56(n) of this title.
(c) For
purposes of paragraph (2) of subsection (b) of this section, the point from
which increases and decreases in compensation are measured shall be the fee
which is paid or earned when the investment performance of such company or fund
is equivalent to that of the index or other measure of performance, and an index
of securities prices shall be deemed appropriate unless the Commission by order
shall determine otherwise.
(d) As
used in paragraphs (2) and (3) of subsection (a) of this section
"investment advisory contract" means any contract or agreement
whereby a person agrees to act as investment adviser to or to manage any
investment or trading account of another person other than an investment
company registered under subchapter I of this chapter.