The Securities and Exchange Commission’s exam division released Wednesday a risk alert highlighting the most common advisor deficiencies related to the agency’s Cash Solicitation Rule, Rule 206(4)-3, which prohibits advisors from paying a cash fee, directly or indirectly, to any person who solicits clients for the advisor, unless certain conditions are met.
The agency Office of Compliance Inspections and Examinations highlighted four deficiency areas:
Solicitor disclosure documents. Advisors’ third-party solicitors did not provide solicitor disclosure documents to prospective clients or provided solicitor disclosure documents that did not contain all the information required by the rule, such as the nature of the relationship and compensation arrangement between the advisor and the solicitor.
Client acknowledgements. Advisors did not timely receive a signed and dated client acknowledgement of receipt of the advisor brochure and the solicitor disclosure document. Some advisors did receive client acknowledgements, but such client acknowledgements were undated or dated after the clients had entered into an investment advisory contract.
Solicitation agreements. Advisors paid cash fees to a solicitor without a solicitation agreement in effect or pursuant to an agreement that did not contain certain specific provisions. For example, OCIE observed solicitation agreements with third-party solicitors that did not contain an undertaking by the solicitor to perform its duties under the solicitation agreement in a manner consistent with the instructions of the adviser, or describe the solicitor’s activities and the compensation to be paid.
Bona fide efforts to ascertain solicitor compliance. Advisors did not make a bona fide effort to ascertain whether third-party solicitors complied with solicitation agreements and appeared to not have a reasonable basis for believing that the third-party solicitors so complied. For example, OCIE observed advisors that were unable to describe any efforts they took to confirm compliance with solicitation agreements.
In response to the OCIE staff’s observations, some advisors elected to amend their disclosure documents and solicitation agreements, revise their compliance policies and procedures, or otherwise change their practices regarding the Cash Solicitation Rule, the agency said.