RIA Compliance and Practice Management Blog

Top RIA Compliance Deficiencies: Firms Paying Solicitors for Referrals

Posted by RIA in a Box

Dec 28, 2014 7:21:17 PM

In 2013, members of the North American Securities Administration Association (NASAA) performed coordinated state exams in which examiners uncovered the top registered investment adviser (RIA) compliance deficiencies across 20 categories in 44 jurisdictions. 1,130 examinations were reported and 6,482 deficiencies were exposed throughout all of the categories. In addition to the top compliance deficiencies we discussed in our earlier blog series, the 2013 NASAA investment adviser examination report also found a number of other types of deficiencies. Last week, we discussed solicitor deficiencies related to firms acting as solicitors.

In this week’s segment, we’ll be discussing deficiencies as it relates to RIA firms paying third party solicitors. Commonly, RIA firms use a third party solicitor in order to attract clients, but this method should be practiced with caution. When paying a solicitor, firms must remain in compliance with both the SEC and state regulations. In 2013, the NASAA report found that 25.0% of all advisers who paid solicitors for referrals had at least one deficiency. This is a significant increase from the 2011 report which noted 14.3% of advisers who used or acted as solicitors had solicitor-related deficiencies.

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The top deficiencies as it relates to paying solicitors in 2013 were:

  1. Solicitor agreement: No written agreement with each solicitor (17.4%)
  2. Solicitor not providing the adviser’s ADV Part 2/disclosure brochure to prospects (8.7%)
  3. Solicitor not providing its solicitor disclosure document to prospects (8.7%)
  4. Solicitor disclosure document: Terms and description of solicitor’s compensation (8.7%)
  5. Solicitor disclosure document: No written document (8.7%)

It should also be noted that the 2011 NASAA exam report also drew attention to the large number of regulatory deficiencies discovered during regulatory audits related to RIA firms not properly disclosing all of the firm’s solicitors.

Given the increase in compliance deficiencies related to third-party solicitors, it is evident that RIA firms should be focusing on staying in compliance with all relevant state or SEC regulatory requirements. As RIA compliance consultants, we strongly encourage the Chief Compliance Officer (CCO) of each investment advisory firm using a third-party solicitor to take a few minutes to review the firm’s current procedures to ensure it is fully disclosing this practice to prospective clients, and also has the proper written agreements in place with the relevant solicitor(s).

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Topics: 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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