Articles Tagged with Cash Solicitation Rule

As discussed in our most recent posting on this blog, the SEC has proposed a wholesale rewrite of its existing advertising and cash solicitation rules. While that last post delved into the specifics of the SEC’s proposed amendment of its advertising rule, in this installment, we take up the Commission’s plans for revamping its cash solicitation rule.

The SEC’s Release No. IA-5407, published on November 4th, aims to modernize both rules to reflect the dramatic changes seen in technology and the advisory industry since the initial adoption of these rules decades ago. While just a proposal for now, it offers the best view into what any ultimate final rules will probably look like. At this stage, RIAs and other industry participants are closely reviewing both proposed rules, and many will be submitting public comments to the SEC as permitted pursuant to the Commission’s public comment process. While the public comment process runs a fixed 60 days, the ultimate publication of final rules is at the SEC’s discretion.

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The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) periodically issues “Risk Alerts” highlighting common deficiencies encountered by its staff during routine investment adviser compliance exams. These Risk Alerts serve the dual purpose of providing advisers with both useful insight into the results of recent OCIE examination activity as well as advance warning of areas that OCIE may be paying closer attention to in the future. Accordingly, a recent Risk Alert issued by OCIE details the most common deficiencies the staff has cited relating to Rule 206(4)-3 (the “Cash Solicitation Rule” or “Rule”) under the Investment Advisers Act of 1940. See National Exam Program Risk Alert, Investment Adviser Compliance Issues Related to the Cash Solicitation Rule (Oct. 31, 2018).

By way of background, the Cash Solicitation Rule prohibits SEC-registered investment advisers from paying a cash fee, directly or indirectly, to any person who solicits clients for the adviser unless the arrangement complies with a number of conditions specified in the Rule, including that the fee must be paid pursuant to a written agreement to which the adviser is a party. Notably, the Rule discerns between solicitors that are affiliated with the registered adviser versus those that are not, setting-up more comprehensive requirements for the latter third-party solicitors. For example, third-party solicitors must provide potential clients with both a copy of the adviser’s Form ADV Part II (or other applicable brochure) and a separate written solicitor’s disclosure document containing specific data about the solicitation arrangement—including the terms of the solicitor’s compensation. Moreover, with respect to third-party arrangements, the Rule obliges advisers to: (i) collect a signed and dated acknowledgment from every potential solicited client that such client has in fact received the adviser’s brochure and the solicitor’s disclosure document; and (ii) make a “bona fide effort” to ascertain whether the solicitor has complied with its duties under the Rule.

In this context, OCIE cited the following as the most noteworthy deficiency areas encountered by its front-line examiners:

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