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April 24, 2012 at 08:00 PM
More and more SEC advisors are engaging solicitors to generate new business. However, the rules and requirements regarding the engagement of solicitors too often go misunderstood or ignored. The SEC and states have become increasingly more aggressive during regulatory exams.
Although the rules governing solicitors differ from state to state, many states have indicated that individuals who refer prospective clients to an SEC advisor are not subject to investment advisor or investment advisor representative registration, or any other qualification requirements (e.g., investment-related designation, passing of exam), so long as the advisor complies with certain requirements.
First, solicitors are not subject to registration if advisors comply with Rule 206(4)-3, or the referral fee rule, under the Advisers Act. Rule 206(4)-3 requires a written agreement between the advisor and the solicitor that sets forth certain terms and conditions of the referral arrangement. The solicitor must provide the prospective client with a copy of the advisor’s written disclosure statement at the time of the solicitation. The solicitor must also provide the client with a separate written disclosure document containing certain information pertaining to the solicitation arrangement, including a description of the solicitor’s compensation. Finally, the advisor must obtain (and maintain for Rule 204-2 recordkeeping purposes) a signed and dated document from the client acknowledging receipt of the disclosure statements. I recommend that the investment advisor agreement executed by the client contain such an acknowledgment.
Another exemption from registration for solicitors is that the solicitor must not be a supervised person of the advisor, such as a partner, officer, director or employee. Furthermore, the solicitor may not give investment advice on behalf of the advisor. Certain states that do permit such individuals to serve as solicitors without registration or qualification may not provide the same exemption for entities like CPA firms or insurance agencies. Thus, to the extent that an advisor seeks referral arrangements with professional firms in these states, he or she may opt to do so with the individual members thereof, rather than with the entity.
