RIA Compliance and Practice Management Blog

SEC Risk Alert Flags Most Common RIA Cash Solicitation Issues

Posted by RIA in a Box

Nov 5, 2018 9:15:00 AM

SEC Risk Alert-1On October 31, 2018, the Securities and Exchange Commission ("SEC") Office of Compliance Inspections and Examinations ("OCIE") released a new National Exam Program Risk Alert outlining the most common registered investment adviser ("RIA") compliance issues related to Rule 206(4)-3 (the “Cash Solicitation Rule”). SEC OCIE staff notes an investment adviser required to registered under the Investment Advisers Act of 1940 (the "Advisers Act") "is prohibited from paying a cash fee, directly or indirectly, to any person who solicits clients for the adviser (a “solicitor”) unless the arrangement complies with a number of conditions." In particular, this risk alert provides examples of the most common regulatory compliance deficiencies related to the cash solicitation rule as observed by SEC OCIE staff during recent regulatory examinations.

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In this latest risk alert, SEC OCIE staff stresses the following requirements when an RIA firm utilizes a third-party solicitor:

  1. the solicitation agreement must contain certain specified provisions (e.g., a description of the solicitation activities and compensation to be received);
  2. the solicitation agreement must require that, at the time of any solicitation activities, the solicitor provide the prospective client with a copy of (a) the adviser’s brochure pursuant to Advisers Act Rule 204-3 (“adviser brochure”) and (b) a separate, written disclosure document containing required information that highlights the solicitor’s financial interest in the client’s choice of an adviser (the “solicitor disclosure document”);t
  3. the adviser must receive from the client, before or at the time of entering into any written or oral agreement with the client, a signed and dated acknowledgment that the client received the adviser brochure and the solicitor disclosure document (“client acknowledgement”); and
  4. the adviser must make a bona fide effort to ascertain whether the solicitor has complied with the solicitation agreement, and must have a reasonable basis for believing that the solicitor has so complied.

Some of the highlighted issues related to Rule 206(4)-3 lead to the following questions for the firm's Chief Compliance Officer ("CCO") to consider when evaluating and testing the firm's compliance program related to the use of solicitors:

  • Solicitor Disclosure Documents
    • Are the firm's third-party solicitors providing disclosure documents to all prospective clients?
    • Do the disclosure documents contain all the information as required by the Cash Solicitation Rule?
    • As it relates to solicitor compensation, does the disclosure document include specific compensation terms and make it clear if the client will pay any additional solicitation fee in addition to the advisory fee?
  • Client Acknowledgements
    • Has the firm received signed and dated acknowledgements in regards to the receipt of the firm's brochure and the solicitor disclosure document from all relevant clients?
    • Are the acknowledgements properly dated and signed prior to the clients entering into an investment advisory contract with the firm?
  • Solicitation Agreements
    • Is a solicitation agreement in place with all third-party solicitors?
    • Do the solicitation agreements in place contain all the required provisions?
    • In particular, do the solicitation agreements require solicitors to provide clients and prospective clients with a current copy of the firm's brochure and solicitor disclosure document?
  • Bona Fide Efforts to Ascertain Solicitor Compliance
    • Does the firm have policies in place to ensure third-party solicitors complied with solicitation agreements?
    • What documented efforts are taking place to ensure third-party solicitor compliance?

We highly recommend that the CCO and all advisory firm principals carefully review this latest SEC RIA compliance risk alert. Failure to address potential third-party solicitor issues can lead to serious compliance issues. In addition, firms should take this opportunity to do the following:

  • Review the firm's solicitor disclosure documents to ensure full and accurate disclosures related to the nature of the relationship, terms of compensation, specific compensation, and total fee charged to the client
  • Review the firm's solicitation agreements to ensure that they contain a requirement for the solicitor to perform its obligations in a manner consistent with the instructions of the adviser, describe the solicitor's activities and the compensation to be paid, and requires the solicitor to provide a current copy of the firm's brochure and solicitor disclosure document. 
  • Inventory and review all client acknowledgements on file to ensure proper compliance and to identify any potential missing acknowledgements
  • Review the firm's policies and procedures to ensure that all potential third-party solicitation issues as outlined in this latest risk alert are properly captured in the firm's compliance manual 
  • Ensure that bona fide efforts to review third-party solicitor compliance are being properly conducted and documented

Be sure to check back soon as we continue to provide updates on relevant RIA regulatory compliance focus areas.

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RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

Topics: RIA Operations, RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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