Recently the Securities and Exchange Commission (“SEC”) released a Risk Alert identifying the most common deficiencies found in third-party solicitor arrangements: Risk Alert. The SEC’s findings and observations are based on adviser examinations completed over the past three years.

Rule 206(4)-3 (the “Solicitor Rule”) prohibits registered investment advisers (“advisers”) from directly or indirectly paying a cash fee to a solicitor for client referrals (the “solicitor”), unless such payment is made pursuant to a written agreement between the adviser and solicitor and the solicitor arrangement complies with the specific conditions outlined in the Solicitor Rule.

Below are the frequently observed deficiencies relating to solicitor arrangements.

Solicitor Disclosure Documents. The SEC noted there was a failure to provide the solicitor disclosure documents to prospective clients. Additionally, the SEC noted there were frequent instances where the solicitor disclosure documents were delivered, but the disclosures contained therein were inadequate and did not contain all the information required by the Solicitor Rule. The Risk Alert specifically referenced solicitor disclosures that described the solicitor’s compensation using vague or hypothetical terms, which were deemed deficient, as opposed to using specific terms describing the actual compensation paid to the solicitor.

What the Solicitation Rule Says: At the time of the solicitation, the solicitor is required to deliver to the client: 1) a current copy of the adviser’s written disclosure brochure and 2) a copy of the solicitor’s separately written disclosure document.

Additionally, the Solicitor’s Rule requires the solicitor’s disclosure document to contain specific information regarding the solicitor, the adviser, the nature of the relationship, the compensation terms, and additional solicitation costs, if any, in addition to the advisory fee.

Thus, failing to deliver an adequate solicitor disclosure document amounts to a violation of the Solicitor Rule.

Client Acknowledgements. The SEC found advisers failed to receive completed client acknowledgements in a timely manner. Additionally, the SEC noted that some advisers received client acknowledgements without dates or were dated after the client has already entered into an advisory agreement with the adviser.

What the Solicitor Rule Says: Prior to, or at the time, of entering into the advisory agreement with a solicited client, the adviser must receive a signed and dated client acknowledgement, which confirms the solicited client received a copy of the adviser’s disclosure brochure and the solicitor’s written disclosure document.

Therefore, if an adviser enters into an advisory agreement with a solicited client without receipt of the signed and dated client acknowledgement, the adviser is in violation of the Solicitor Rule.

Solicitation Agreements. The SEC observed that advisers paid a cash fee to a solicitor without a solicitation agreement in place or paid a cash fee to a solicitor pursuant to a solicitation agreement that failed to include required contractual provisions.

What the Solicitor Rule Says: The Solicitor Rule specifically identifies the contractual provisions that must be included in the solicitation agreement:

  1. a clause describing the solicitation activities to be performed and the compensation to be received;
  2. a clause obligating the solicitor to perform its duties in a manner that is consistent with the adviser’s instructions and provisions of the Advisers Act;
  3. a clause requiring the solicitor to deliver the adviser’s disclosure brochure and the solicitor’s disclosure document at the time of the solicitation.

Thus, for the written solicitation agreement to comply with the Solicitor Rule, it must include all contractual provisions as required.

Bona Fide Efforts to Ascertain Solicitor Compliance. The SEC noted advisers failed to make a bona fide effort to determine whether solicitors were complying with the solicitation agreements and further noted that the advisers did not have a reasonable basis to believe the solicitor complied.

What the Solicitor Rule Says: The Solicitor Rule obligates the adviser to put forth the effort to make the determination of whether the solicitor is complying with the terms of the solicitation agreement. Furthermore, the adviser must have a reasonable basis for believing that the solicitor has in fact complied.

Thus, paying a solicitor fee without ascertaining whether that solicitor complied with the solicitation agreement is a violation of the Solicitor Rule.

Lastly, the SEC referenced advisers with similar conflicts that could implicate violations of other provisions of the Advisers Act, such as the adviser’s fiduciary duties. For example, advisers recommending service providers in exchange for client referrals without disclosing the conflicts of interest.

To ensure compliance with the Solicitor Rule you should review and assess your solicitation agreement(s) and the solicitor disclosure document(s). Additionally, you should review your disclosure brochure (ADV 2A) to ensure that all conflicts of interest are fully disclosed. Finally, your policies and procedures must address not only your compliance with the Solicitor Rule, but also the solicitor’s compliance with the written solicitation agreement.


DeeAnn Dempsey

DeeAnn Dempsey is a consultant at NCS Regulatory Compliance and an attorney with Dew, Foxman and Haugh, PLLC. As a consultant, DeeAnn advises state and federally registered investment advisers on compliance and regulatory matters. DeeAnn received her Bachelor of Arts degree from Stetson University and her Juris Doctor degree from Florida A&M University College of Law. DeeAnn is admitted to the State Bar of Florida.




This article is not a solicitation of any investment product or service to any person or entity. The content contained in this article is for informational use only and is not intended to be and is not a substitute for professional financial, tax or legal advice

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