RIA Compliance Tips

The Solicitor's Rule

As an independently registered investment adviser you may have considered using third party solicitors as a way to increase your advisory business.  Whether you have made the decision to use solicitors as a means to develop your practice, or are merely considering the option, you will want to become aware of the rules and regulations regarding the use of solicitors.  Listed below are a few compliance tips to help you understand the solicitation rules, and your obligations under these rules, as required by the Investment Adviser's Act of 1940 (“Act”).  

The Solicitor's Rule

Rule 206-4(3) of the Adviser's Act defines the rules under which cash payments may be made to individuals for advisory client referrals on behalf of your firm. Generally speaking, the rule states that it shall be unlawful for any investment adviser who is required to be registered under the Act to pay a cash fee, directly or indirectly, to a solicitor with respect to solicitation activities unless:

• The fee is paid by an adviser who is required to be registered under the Act;
• The solicitor is not subject to any action or order that would disqualify them from eligibility to receive such compensation under the Act, and;
• All cash fees are paid pursuant to a written agreement between the adviser and solicitor. 

Written Agreement

The written agreement between the adviser and solicitor should set forth the terms and conditions of the referral arrangement by describing:

• The solicitation activities to be engaged in by the solicitor on behalf of the investment adviser and the compensation to be received;
• An undertaking by the solicitor to perform their duties under the agreement in a manner consistent with the instructions of the investment adviser and the provisions of the Act, and the rules there under;
• The requirement of the solicitor to, at any time during the solicitation, provide the client with a current copy of the investment adviser's written disclosure statement (as required by the "brochure rule") and a separate written solicitor's disclosure document detailing the relationship between the adviser and the solicitor.

Advisers also should be aware that persons directly under their supervision (ie.partners, officer, employees, directors, or any entity in a control relationship with the adviser) are eligible to receive compensation under the Solicitor's Rules, provided the nature of the relationship to the firm is disclosed to the prospective clients at the time of solicitation.   The disclosure rules for affiliated solicitors differ in that a separate written agreement between the affiliated solicitor and the advisor is not required, nor is there a requirement under the Act to disclose the specifics of the solicitation agreement to the client (ie. delivery of solicitor's disclosure document).

Solicitor's Disclosure Document

The solicitor's written disclosure document to be furnished to the client by an unaffiliated solicitor must contain the following information: 

• The name of the solicitor;
• The name of the investment adviser;
• The nature of the relationship between the solicitor and the investment adviser;
• A statement that the solicitor will be compensated for his solicitation services by the investment adviser;
• The terms of such compensation arrangement, including a description of the compensation paid or to be paid to the solicitor; and
• The amount, if any, the client will be charged in addition to the standard advisory fee due to the solicitor’s activities.

Advisers should be aware that they are obligated to demonstrate that they have made a bona fide effort to ascertain whether the solicitor has complied with the written agreement, and that they have a reasonable basis for believing that the solicitor has so complied.  This requirement can typically be satisfied by asking the prospect for feedback regarding the solicitor’s conduct during the solicitation and memorializing the feedback received (including any actions taken where inappropriate conduct was noted).

Client Acknowledgement of Receipt of Disclosure Documents

The Solicitor's Rule also requires that the solicitor obtain a signed and dated acknowledgment from the client indicating they received both the adviser's brochure and solicitor's disclosure document during the solicitation process.  This documentation must be retained regardless of whether the prospect ultimately becomes a client of the adviser.

Books and Records Requirements

Rule 204-2 of the Act specifies that the adviser must retain copies of the written agreement between the solicitor and the adviser, copies of the solicitor's disclosure statement, the adviser’s Form ADV Part II and/or brochure, and copies of each acknowledgement of receipt of required disclosure information.

Additional Considerations

Advisers should be aware that the solicitor's rules typically apply to individuals, not entities. Therefore, it is best to establish these relationships directly with the individuals of a firm rather than with the entity itself, to avoid any potential violation of the Solicitor’s Rules.

In addition, because the laws regulating solicitors differ on a state by state basis, it is important that advisers first determine if any corresponding filing, registration, and/or other qualification requirements are applicable to the adviser or solicitor, prior to engaging the services of a solicitor.  You will find a directory listing of state regulator contacts at www.iard.com or www.nasaa.org. 

More information on this topic can be found on the SEC website at http://www.sec.gov/divisions/investment.shtml.

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