By: Jim Hooks, Guest Blogger and CCO
Published March 6, 2019
We have talked at length about the importance of networking with other professionals to secure valuable introductions to potential new clients. Do you ever pay accountants, attorneys, or real estate agents for those business referrals? The SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert in October 2018 highlighting common compliance issues related to the “Cash Solicitation Rule” detected during their inspections. If you are currently paying a referral fee, have you verified you are meeting the regulatory requirements? If not, now is a good time to examine your procedure.
Rule 206(4)-3 under the Investment Advisers Act of 1940 makes it unlawful for investment advisors to pay a fee to a solicitor unless certain conditions are met. Here is a summary of the conditions in Rule 206(4)-3 that must be met.
- The investment advisor must be registered under the Act and the solicitor cannot be prohibited from receiving the fee for reasons listed in the Rule.
- The fee must be paid pursuant to a written agreement.
Written Agreement Requirements
- Description of the solicitation activities and compensation arrangement.
- The solicitor’s agreement to comply with the instructions of the investment advisor and requirements under the Act.
- Requirement for the solicitor to provide the client with the investment advisor’s ADV Part 2A Brochure and, for individual advisors, Part 2B Brochure Supplement and a solicitor’s disclosure statement.
Solicitor’s Disclosure Statement Requirements
- The name of the solicitor and investment advisor and the nature of the arrangement.
- A statement that the solicitor will be compensated by the advisor and the terms of the compensation arrangement.
- The amount, if any, that will be added to the advisory fee and the differential attributable to the referral agreement.
Prior to, or at the time of, the client entering into an advisory contract, the investment advisor is required to receive from the client a signed and dated written acknowledgment of receipt of the investment advisor’s written disclosures and the solicitor’s written disclosure document.
Engaging in professional referral agreements can be an effective way to grow your advisory business, but it must be done the right way. If you have questions, be sure to ask your compliance team. Investment advisors should pay close attention to the Risk Alert, carefully review their policies and procedures and, if needed, promptly make improvements.