The following are a selection of frequently asked questions related to solicitor referral arrangements.
Yes, an SEC registered investment adviser firm may pay cash referral fees to a third-party (non-employee) that solicits investment adviser clients on behalf of the registered investment adviser firm only if such a solicitor arrangement is in compliance with SEC Rule 206(4)-3 under the Investment Advisers Act of 1940.
Under SEC Rule 206(4)-3, a solicitor referral arrangement between the investment adviser and third-party (non-employee) solicitor must be in writing, which needs to include provisions related to the following: (a) the scope of the solicitor’s activities; (b) a covenant by the solicitor to perform such activities consistent with instructions of the investment adviser and in compliance with the Investment Advisers Act of 1940 and associated rules; and (c) a covenant by the solicitor to provide the client with a copy of the investment adviser’s Form ADV Part 2A and a separate written solicitor disclosure.
As outlined by SEC Rule 206(4)-3, the separate written solicitor disclosure must include the following information:
Yes, the investment advisor firm can pay a portion of the ongoing investment advisory fee charged to the client each billing period as long as such payments are consistent with the Form ADV and separate written solicitor disclosure given to the client and in accordance with the requirements of SEC Rule 206(4)-3.
The Investment Advisers Act of 1940 and the associated SEC rules do not require the solicitor to register as an investment adviser as long as the solicitor’s activities are strictly limited to merely referring clients to a registered investment adviser in compliance with SEC Rule 206(4)-3. However, the majority of state securities regulators define the solicitation or referral of investment advisory clients as an investment advisory activity requiring the registration of the solicitor as an investment adviser or investment adviser representative. A registered investment adviser considering a solicitor arrangement should verify whether the intended solicitor’s activity is included under the state securities regulator’s definition of an investment adviser representative.
No, the referring solicitor required to be registered as investment adviser representative does not usually have to be registered under the investment adviser firm receiving the referrals.
Individuals subject to a statutory disqualification under Section 203 of the Investment Advisers Act of 1940 (“Act”) cannot be paid a solicitor referral fee. Such a statutory disqualification would include the following:
If a solicitor is not registered as an investment adviser or investment adviser representative with the applicable securities regulators, then the solicitor may not provide invest advice about a security or the securities market to a prospective or existing client. Moreover, an unregistered solicitor cannot provide advice to a client regarding a client’s investment objective or an investment adviser’s investment strategy or performance.
A solicitor that is registered as an investment adviser or investment adviser representative can provide advice about a security and/or the securities market to a prospective or existing client.
No, a solicitor is not required to provide a client with a separate written solicitor disclosure when the registered investment adviser firm only provides investment advisory services that are not personalized to the specific client or otherwise purports to meet the objectives or needs of the specific client.
Yes, if a registered investment adviser firm pays a third-party solicitor for referrals, there are several disclosures that need to be made in the Form ADV. The number of third-party solicitors used by the registered investment adviser needs to be indicated in response to Item 5.B(6) of the Form ADV Part 1. In Form ADV Part 2A, Item 14.B Client Referrals and Other Compensation, “If you or a related person directly or indirectly compensates any person who is not your supervised person for client referrals, describe the arrangement and the compensation.”
*The information contained in this Frequently Asked Questions webpage is general in nature and intended for educational purposes only and is not intended to be a comprehensive analysis of the securities regulations applicable to registered investment advisers. It is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. For more information, please see our Disclosures.