NASAA Proposes Model Rule Regarding Solicitors for Registered Investment Advisors
The Investment Adviser Regulatory Policy and Review Project Group of the North American Securities Administrators Association (known as "NASAA" and essentially consisting of state securities regulators) recently solicited comments from the public on a proposed model rule regarding solicitors for registered investment advisors. The comment period ended in August and NASAA has not yet released a final version of the model rule. According to NASAA’s website, the model rule “is necessary and appropriate to facilitate the regulation of solicitor activity for the benefit of investors, to promote uniformity among the states and between states and federal rules, and to provide guidance to the industry.”
The proposed model rule for solicitor arrangements reaffirms the solicitor/investment advisor written agreement and client disclosure requirements that are already on the books in many states. But the proposed model rule goes further to make very clear that the solicitor must be licensed as an investment advisor representative. While most states require solicitors to license as investment advisor representatives, there is a high level of confusion within the industry regarding solicitor registration and qualifications. Currently, only about 10 states do not require solicitors to license as investment advisors so the model rule includes a provision exempting solicitors from the investment advisor representative licensing requirements for states that choose to do so. The model rule is designed to mirror Rule 206(4)-3 of the U.S. Securities and Exchange Commission ("SEC") provisions for statutory disqualifications, written agreements and disclosures to clients.
NASAA’s proposed rules are being provided under the Uniform Securities Act of 1956 and under the Uniform Securities Act of 2002. Therefore it is important to note that just because NASAA adopts a new model rule, it does not mean every state will automatically adopt the rule. While many states strictly follow the Uniform Securities Act’s provisions for investment advisors, some do not. Also, the adoption of any new rule must be made by the individual state. For example, in some states the securities division is given more latitude to implement new rules while other states securities division may require specific authorization from the state legislature. You can read more about the proposed rule on the NASAA website.
To learn information about the regulatory requirements for investment advisor solicitor arrangements, you can purchase our webinar, “Establishing & Supervising Solicitor Arrangements," recorded on August 19, 2009 and view on-demand for a purchase price of $59.95. During this webinar, our consultants review in detail the requirements of SEC Rule 206(4)-3, the registration requirements of certain states and best supervisory practices for an investment adviser utilizing solicitors.
Purchase this on-demand webinar, “Establishing & Supervising Solicitor Arrangements," for $59.95 by clicking below.
The proposed model rule for solicitor arrangements reaffirms the solicitor/investment advisor written agreement and client disclosure requirements that are already on the books in many states. But the proposed model rule goes further to make very clear that the solicitor must be licensed as an investment advisor representative. While most states require solicitors to license as investment advisor representatives, there is a high level of confusion within the industry regarding solicitor registration and qualifications. Currently, only about 10 states do not require solicitors to license as investment advisors so the model rule includes a provision exempting solicitors from the investment advisor representative licensing requirements for states that choose to do so. The model rule is designed to mirror Rule 206(4)-3 of the U.S. Securities and Exchange Commission ("SEC") provisions for statutory disqualifications, written agreements and disclosures to clients.
NASAA’s proposed rules are being provided under the Uniform Securities Act of 1956 and under the Uniform Securities Act of 2002. Therefore it is important to note that just because NASAA adopts a new model rule, it does not mean every state will automatically adopt the rule. While many states strictly follow the Uniform Securities Act’s provisions for investment advisors, some do not. Also, the adoption of any new rule must be made by the individual state. For example, in some states the securities division is given more latitude to implement new rules while other states securities division may require specific authorization from the state legislature. You can read more about the proposed rule on the NASAA website.
To learn information about the regulatory requirements for investment advisor solicitor arrangements, you can purchase our webinar, “Establishing & Supervising Solicitor Arrangements," recorded on August 19, 2009 and view on-demand for a purchase price of $59.95. During this webinar, our consultants review in detail the requirements of SEC Rule 206(4)-3, the registration requirements of certain states and best supervisory practices for an investment adviser utilizing solicitors.
Purchase this on-demand webinar, “Establishing & Supervising Solicitor Arrangements," for $59.95 by clicking below.
Labels: Solicitors, Webinar
posted by bhill at 7:48 PM
Licensing of Solicitors as Investment Advisor Representatives Required by Most State Securities Regulators
Did you know that most state securities regulators require paid solicitors of registered investment advisor firms to license as investment advisor representatives? This means that the solicitor must either establish his/her own registered investment advisor or license under an existing registered investment advisor. From the solicitor's perspective it is far easier to simply license under an existing registered investment advisor rather than forming a new registered investment advisor. However, what does that mean for the existing registered investment advisor holding the solicitor's investment advisor representative license?
When a solicitor is licensed as an investment advisor representative under a registered investment advisor, the registered investment advisor becomes much more responsible for the investment advisory activities of the solicitor. The relationship moves away from a due diligence requirement to a supervision requirement. A registered investment advisor must treat all licensed investment advisor representatives, even those that are just solicitors, as supervised persons for purposes of the firm's compliance policies and procedures and code of ethics. Therefore, in addition to ensuring compliance with the SEC's solicitor rule, the solicitor must follow the firm's written compliance policies and procedures including the firm's code of ethics. The registered investment advisor must establish reasonable policies and procedures designed to properly supervise its licensed solicitors. These procedures could include training events, advertising limitations, and monitoring the actual services provided by the solicitor.
If your firm has an active solicitor program, is considering such a program or if you just want to learn more about SEC Rule 206(4)-3, please join us for our August 19 webinar titled "Establishing & Supervising Solicitor Arrangements". This timely webinar is being presented by Jarrod James, Vice President and Senior Compliance Consultant at RIA Compliance Consultants, Inc. The cost of the webinar is $59.95 and will detail the requirements of Rule 206(4)-3, discuss best tips for complying with the rule and provide opportunity for attendees to pose specific questions. We will be examining the differences between affiliated and unaffiliated solicitors and the ramifications of holding licenses of solicitor-only investment advisor representatives.
Purchase your webinar seat now: https://www2.gotomeeting.com/register/673425275
*The webinar has been accepted by the CFP Board for 1 hour of General CFP® continuing education credit.
When a solicitor is licensed as an investment advisor representative under a registered investment advisor, the registered investment advisor becomes much more responsible for the investment advisory activities of the solicitor. The relationship moves away from a due diligence requirement to a supervision requirement. A registered investment advisor must treat all licensed investment advisor representatives, even those that are just solicitors, as supervised persons for purposes of the firm's compliance policies and procedures and code of ethics. Therefore, in addition to ensuring compliance with the SEC's solicitor rule, the solicitor must follow the firm's written compliance policies and procedures including the firm's code of ethics. The registered investment advisor must establish reasonable policies and procedures designed to properly supervise its licensed solicitors. These procedures could include training events, advertising limitations, and monitoring the actual services provided by the solicitor.
If your firm has an active solicitor program, is considering such a program or if you just want to learn more about SEC Rule 206(4)-3, please join us for our August 19 webinar titled "Establishing & Supervising Solicitor Arrangements". This timely webinar is being presented by Jarrod James, Vice President and Senior Compliance Consultant at RIA Compliance Consultants, Inc. The cost of the webinar is $59.95 and will detail the requirements of Rule 206(4)-3, discuss best tips for complying with the rule and provide opportunity for attendees to pose specific questions. We will be examining the differences between affiliated and unaffiliated solicitors and the ramifications of holding licenses of solicitor-only investment advisor representatives.
Purchase your webinar seat now: https://www2.gotomeeting.com/register/673425275
*The webinar has been accepted by the CFP Board for 1 hour of General CFP® continuing education credit.
Labels: Solicitors
posted by bhill at 11:25 AM
Renewed SEC Scrutiny of Registered Investment Advisors Using Solicitors
We frequently hear stories and receive questions from our registered investment advisor clients about the benefits of receiving client referrals from outside professional sources. Such outside professionals can include CPAs, attorneys, and insurance agents. While the U.S. Securities and Exchange Commission ("SEC") does not generally have an issue when an SEC registered investment advisor uses employees or outside sources to generate client referrals, the SEC has taken the position that a line is crossed when payment is provided for such referrals. When fees (including non-cash payments) are paid by an SEC registered investment advisor for client referrals, SEC Rule 206(4)-3 sets forth specific requirements that must be followed. The requirements are different depending on whether the solicitor is affiliated or unaffiliated with the registered investment advisor. For example, when an unaffiliated solicitor refers a client to an SEC registered investment advisor, the unaffiliated solicitor is required to provide written disclosures to the prospective client outlining the unaffiliated solicitor’s arrangement with the firm and the compensation that may be received. The disclosure must be provided at the time of solicitation.
In addition to requirements under SEC Rule 206(4)-3, SEC registered investment advisor firms must have a thorough understanding of applicable state rules. The majority of state securities regulators include the terms solicitor or referral in the definition of investment advisor representative and therefore require the referring party to be licensed as such. This means passing the Series 65 exam, filing a Form U4, paying the licensing fee, and receiving approval by the state securities regulator; all prior to soliciting the first client for a fee. Some state securities regulators even require companies that receive solicitor fees to be registered as an investment advisor even though they may provide no other advisory services. In these cases, the referring firm would need to file a Form ADV and other required documents in order to register directly with the state securities regulator.
From our experience, non-compliance with SEC Rule 206(4)-3 will all-too-often result in deficiencies during SEC examinations. Some of the specific deficiencies include failing to have an adequate agreement with the solicitor; failure to require that the solicitor provide written disclosures; and failure to maintain all required books and records related to the solicitor arrangement. Inadequate disclosure in the firm’s Form ADV Part II, Schedule F or similar disclosure document is another common deficiency. In more egregious situations, registered investment advisors have been cited for altogether failing to disclose to clients the fees paid to solicitors.
More recently, we have seen the SEC initiate administrative and enforcement proceedings citing SEC Rule 206(4)-3. One such case was in June of this year when the SEC charged Cohmad Securities Corporation and some of its personnel alleging that they collectively raised billions of dollars from investors for Bernard Madoff’s Ponzi scheme. Given the fact that paid solicitor programs present an inherent conflict of interest between registered investment advisors and their clients and given the fact that solicitors (i.e. feeder funds) played such a significant role in the Madoff scandal, we fully expect the SEC to increase scrutiny on paid solicitor arrangements.
If your firm has an active solicitor program, is considering such a program or if you just want to learn more about SEC Rule 206(4)-3, please join us for our August 19 webinar titled “Establishing & Supervising Solicitor Arrangements”. This timely webinar is being presented by Jarrod James, Vice President and Senior Compliance Consultant at RIA Compliance Consultants, Inc. The cost of the webinar is $59.95 and will detail the requirements of SEC Rule 206(4)-3, discuss best tips for complying with the rule and provide opportunity for attendees to pose specific questions.
*The webinar has been accepted by the CFP Board for 1 hour of General CFP® continuing education credit.
Labels: Solicitors
posted by bhill at 4:52 PM
Join Us for a Webinar: Establishing & Supervising Solicitor Arrangements
Does your investment adviser act as a solicitor for another investment adviser or utilize a third-party as a solicitor of your investment advisory services?
If so, your registered investment adviser firm could possibly face regulatory and civil liability risks due to the negligence, misconduct or fraud of this third-party. Learn how your registered investment adviser firm can protect or mitigate its risks by attending our webinar, "Establishing & Supervising Solicitor Arrangements," on Wednesday, August 19, 2009 from 12:00 p.m. to 1:00 p.m. CST.
During this webinar, our consultants will review in detail the requirements of SEC's solicitor rule for registered investment advisers, the registration requirements of certain states for third- party solicitors, and examples of best supervisory practices for a registered investment adviser utilizing solicitors and due diligence activities by a solicitor referring clients to a registered investment adviser.
For only $59.95, you can purchase a seat to RIA Compliance Consultants' webinar, "Establishing & Supervising Solicitor Arrangements," scheduled for 12:00 - 1:00 p.m. CST on Wednesday, August 19, 2009. You can start the registration process by following the payment instructions and clicking on the registration link below.
For online payment by credit card, after completing the webinar registration page, you will be re-directed to a PayPal shopping cart for processing. If you prefer to pay over the telephone, after completing the webinar registration page, please contact Crystal Walz at cwalz@ria-compliance-consultants.com or 877-345-4034 x 100.
Purchase now your webinar seat for $59.95: https://www2.gotomeeting.com/register/673425275
Labels: Solicitors
posted by bhill at 7:49 PM
New Hampshire Waives the Series 65 Exam Requirement for Solicitors
Under House Bill 889, the State of New Hampshire recently amended its Uniform Securities Act (RSA 421-B:2) to exempt an individual, who is an investment adviser or investment adviser representative and conducting investment advisory business solely as a solicitor, from the Series 65 examination requirement.
Although there is now a statutory provision permitting the wavier of the examination requirement for an individual who conducts investment advisory business only by referring client to a licensed investment adviser, such an individual acting as a solicitor must still apply for and maintain a registration with New Hampshire as an investment adviser or investment adviser representative.
Based on the amended statute, a solicitor’s request for an examination wavier by New Hampshire should include the following: (a) the solicitation agreement between the solicitor and other investment adviser; (b) a sample client disclosure acknowledging the terms of the solicitor arrangement; and (c) an undertaking by the solicitor that the solicitor will obtain from the client a signed and dated acknowledgement of receiving the solicitor arrangement disclosure.
If you need assistance in applying for a Series 65 examination wavier or ensuring your solicitor arrangement meets the requirements of the New Hampshire Bureau of Securities, please contact RIA Compliance Consultants at 877-345-4034.
Although there is now a statutory provision permitting the wavier of the examination requirement for an individual who conducts investment advisory business only by referring client to a licensed investment adviser, such an individual acting as a solicitor must still apply for and maintain a registration with New Hampshire as an investment adviser or investment adviser representative.
Based on the amended statute, a solicitor’s request for an examination wavier by New Hampshire should include the following: (a) the solicitation agreement between the solicitor and other investment adviser; (b) a sample client disclosure acknowledging the terms of the solicitor arrangement; and (c) an undertaking by the solicitor that the solicitor will obtain from the client a signed and dated acknowledgement of receiving the solicitor arrangement disclosure.
If you need assistance in applying for a Series 65 examination wavier or ensuring your solicitor arrangement meets the requirements of the New Hampshire Bureau of Securities, please contact RIA Compliance Consultants at 877-345-4034.
Labels: Solicitors
posted by bhill at 9:38 PM
California Proposes Amendments to Rules under the Corporate Securities Law of 1968
Earlier this month, the California Department of Corporations announced proposed changes to rules regulating investment advisers registered in California. According to the release, the objective in proposing the amendments is to increase uniformity with the model rules suggested by the North American Securities Administrators Association (NASAA), rules already in effect in other states, and rules established by the Securities and Exchange Commission (SEC). California is giving the public an opportunity to comment on the proposed changes. The time period for comment ends on October 30, 2007.
The proposed rules will have an impact on registered investment advisors in California, and all registered investment advisor firms doing business in California should take time to read the various releases and the text of the proposed rules. We feel the following are some of the more important changes proposed.
RIA Compliance Consultants, Inc. can help your firm comply with these proposed changes. Contact us to find out more about our written compliance manual and code of ethics drafting and reviewing services.
The proposed rules will have an impact on registered investment advisors in California, and all registered investment advisor firms doing business in California should take time to read the various releases and the text of the proposed rules. We feel the following are some of the more important changes proposed.
- Requirement to establish and maintain written procedures designed to supervise employees and ensure their compliance with securities laws.
- Incorporation of the principles governing performance-based advertising set forth in the 1996 SEC No-Action letter involving Clover Capital Management.
- Requirement to provide all clients a written disclosure document containing the same information in Form ADV Part II. While we suggest all registered investment advisors provide a disclosure document to clients, apparently this has not been a requirement in California.
- Amendment to the definition of custody and the procedures regarding custody. This rule will mirror the NASAA Model Rule for custody.
- Rule requiring the implementation of codes of ethics. The rule will copy the same requirements set forth under the SEC’s codes of ethics rule (Rule 204A-1 under the Advisers Act).
- Changes to “largely mirror” Rule 206(4)-3 of the Advisers Act which sets forth requirements that must be followed when fees are paid to solicitors.
- The adoption and implementation of a business continuity plan.
RIA Compliance Consultants, Inc. can help your firm comply with these proposed changes. Contact us to find out more about our written compliance manual and code of ethics drafting and reviewing services.
Labels: Advertising, Code of Ethics, Custody, Form ADV, Solicitors
posted by bhill at 3:00 PM
Ohio Prohibits Mortgage Brokers & Loan Officers From Obtaining Referral Fee From Affiliated Registered Investment Adviser
In the most recent quarterly Ohio Securities Bulletin, the Ohio Division of Securities, which is the regulator of state registered investment advisers in Ohio, noted a recent position taken by its sister division, the Ohio Division of Financial Institutions, which regulates banks and mortgage brokers, since it may have implications to registered investment advisers registered affiliated with banks or mortgage brokers in Ohio.
The following is an excerpt directly from the Ohio Securities Bulletin:
The [Ohio] Division of Financial Institutions stated a position in its Mortgage Brokers and Lenders Letter No. 2006-2 that could potentially affect investment advisers. The Division cited the prohibition against mortgage brokers or loan officers “obtaining a referral fee from a party with a related interest in the transaction” found in R.C. section 1322.071(B)(3). The Letter notes that a “person acting as an investment adviser urging the refinancing or purchase of property who also acts as the loan officer in the same transaction effectively is obtaining fees through a self-referral.”
The Letter added that “the notion of borrowing one’s home equity to invest in the market is a risky strategy, which should not be undertaken where there is a significant conflict of interest arising from considerations of the mortgage broker or loan officer’s own profit or remuneration when counseling such an investment strategy.” The Division concluded that acting as both an investment adviser and a loan officer in the same transaction is an “improper and dishonest practice” which violates R.C. 1322.07(C) and recommended that registrants and licensees review their policies regarding the matter.
Both state and SEC registered investment adviser firms with affiliated banks or mortgage brokers in Ohio or investment adviser representatives acting as loan officers or mortgage brokers in Ohio need to review their business practices and supervisory policies and procedures in light of this letter.
The following is an excerpt directly from the Ohio Securities Bulletin:
The [Ohio] Division of Financial Institutions stated a position in its Mortgage Brokers and Lenders Letter No. 2006-2 that could potentially affect investment advisers. The Division cited the prohibition against mortgage brokers or loan officers “obtaining a referral fee from a party with a related interest in the transaction” found in R.C. section 1322.071(B)(3). The Letter notes that a “person acting as an investment adviser urging the refinancing or purchase of property who also acts as the loan officer in the same transaction effectively is obtaining fees through a self-referral.”
The Letter added that “the notion of borrowing one’s home equity to invest in the market is a risky strategy, which should not be undertaken where there is a significant conflict of interest arising from considerations of the mortgage broker or loan officer’s own profit or remuneration when counseling such an investment strategy.” The Division concluded that acting as both an investment adviser and a loan officer in the same transaction is an “improper and dishonest practice” which violates R.C. 1322.07(C) and recommended that registrants and licensees review their policies regarding the matter.
Both state and SEC registered investment adviser firms with affiliated banks or mortgage brokers in Ohio or investment adviser representatives acting as loan officers or mortgage brokers in Ohio need to review their business practices and supervisory policies and procedures in light of this letter.
Labels: Outside Business Activities, Solicitors
posted by bhill at 10:25 AM
Client Referral Sources: Don’t Forget About the Regulations
A recent article in Investment Advisor magazine discussed the benefit of using clients as referral sources and the growing practice of using other professionals, such as CPAs and attorneys, to help land clients as well. This article brings to mind the importance of understanding SEC Rule 206(4)-3. (A state registered investment advisor should refer to the state rule on the subject.)
While the SEC does not generally have an issue with using employees or outside sources for client referrals, the Commission has clearly taken the position that a line is crossed upon payment for such referrals. When fees are paid by an SEC registered advisor for client referrals, Rule 206(4)-3 requires a formal agreement between the two parties and disclosures to be provided to the client. The referring party must provide a copy of the advisor firm’s disclosure brochure and a solicitor’s disclosure statement, which must indicate the amount received for the referral. In addition, due diligence must be performed on the referring party to ensure the person or company has not violated any SEC rules as spelled out under Rule 206(4)-3 or has been disqualified from advisor registration.
In addition to the Rule 206(4)-3, SEC registered firms must give attention to state rules as well. The majority of state regulators include the terms solicitor or referral in the definition of investment advisor representative and therefore require the referring party to be licensed as such. This means passing the Series 65 exam, filing a Form U4, paying the licensing fee, and receiving approval by the state; all prior to soliciting the first client for a fee. Some states even require companies that receive solicitor fees to be registered as an investment advisor even though they may provide no other advisory services. In these cases, the referring firm would need to file a Form ADV and other required documents in order to register directly with the state.
Finally, it's important to consult with the state accounting board or bar association to determine whether a solicitor fee is permissible when working with accountants or lawyers. Special precautions need to be taken for referral arrangements involving ERISA covered accounts or plan fiduciaries. Please see our earlier postings.
If you have specific questions about any solicitor/referral arrangements you have or would like to discuss the rules in more detail, please give us a call.
While the SEC does not generally have an issue with using employees or outside sources for client referrals, the Commission has clearly taken the position that a line is crossed upon payment for such referrals. When fees are paid by an SEC registered advisor for client referrals, Rule 206(4)-3 requires a formal agreement between the two parties and disclosures to be provided to the client. The referring party must provide a copy of the advisor firm’s disclosure brochure and a solicitor’s disclosure statement, which must indicate the amount received for the referral. In addition, due diligence must be performed on the referring party to ensure the person or company has not violated any SEC rules as spelled out under Rule 206(4)-3 or has been disqualified from advisor registration.
In addition to the Rule 206(4)-3, SEC registered firms must give attention to state rules as well. The majority of state regulators include the terms solicitor or referral in the definition of investment advisor representative and therefore require the referring party to be licensed as such. This means passing the Series 65 exam, filing a Form U4, paying the licensing fee, and receiving approval by the state; all prior to soliciting the first client for a fee. Some states even require companies that receive solicitor fees to be registered as an investment advisor even though they may provide no other advisory services. In these cases, the referring firm would need to file a Form ADV and other required documents in order to register directly with the state.
Finally, it's important to consult with the state accounting board or bar association to determine whether a solicitor fee is permissible when working with accountants or lawyers. Special precautions need to be taken for referral arrangements involving ERISA covered accounts or plan fiduciaries. Please see our earlier postings.
If you have specific questions about any solicitor/referral arrangements you have or would like to discuss the rules in more detail, please give us a call.
Labels: Solicitors
posted by bhill at 12:25 PM
