Planning
to hire a Solicitor?
October
31, 2018. A recent risk alert published by The SEC Office
of Compliance Inspections and Examinations (OCIE) identified several frequent
violations to the “Cash Solicitation Rule.”
This article aims to assist investment
advisors to identify potential problems and take corrective measures in
compliance with federal (and similar state) regulations on client solicitations.
Disclosing
your solicitor arrangements
Investment advisors have an obligation to disclose direct
(and indirect) financial incentives to solicitors for client referrals. When Registered Investment Advisers (RIAs)
expand their business, they may pay cash referral fees to a third-party that
solicits prospective clients on behalf of the firm — but only if the formal
“solicitation arrangement” adheres to SEC Rule 206(4)-3 under the Investment
Advisers Act of 1940.
Solicitor
Agreement Requirements
All client solicitation arrangements must be documented
in a written agreement and include the amount and scope of the referral-based
activity. In addition, the solicitor must
provide prospective clients with: (1) a copy of the RIA firm's disclosure document
(ADV Part 2A/B Brochure) and (2) a separate solicitor disclosure statement. Moreover, before establishing a client
relationship, the investment advisor must obtain written confirmation that the
prospective client received all required documents.
Improper solicitor procedures are a common discrepancy
discovered during regulatory audits. Advisors
should carefully review their referral agreements and their sales activities to
ensure compliance with the “Cash Solicitation Rule.” Federal and State regulators require all firms
to make a bona fide effort to ensure the referral agent complies with
the solicitation agreement.
OCIE
Findings on Solicitations
The SEC Risk Alert titled, “Investment Adviser Compliance Issues Related to the Cash Solicitation
Rule” includes the following discrepancies:
#1
– Failure to Disclose Documents
OCIE staff observed advisors, who used third-
party solicitors, did not provide disclosure documents to prospective customers. For those advisors who did send documents,
the agreements did not contain all the information required by the Cash
Solicitation Rule.
Solicitor disclosure documents must include the exact figures
and other terms agreed upon by the advisor and solicitor. The SEC will consider
vague or hypothetical language to describe the solicitor’s compensation as
a violation of the Rule.
And lastly, advisors should specify any additional costs
the solicited client will be charged besides the advisory fee.
#2
– Failure to Obtain Client Approval
OCIE staff observed that many advisors did not receive a
signed and dated client acknowledgment for the receipt of the firm brochure.
For those who did receive acknowledgements, the
attestations were dated after the clients had entered into an investment
advisory contract.
#3
– Incomplete or No Solicitation Agreements
OCIE staff noted that some advisors, who paid cash fees
to an agent, failed to execute a solicitor agreement whatsoever. With other cases, the OCIE staff found
agreements that did not have the required provisions, such as the following:
Advisors did not include any limits to the allowed
activities or instructions for solicitors to perform their duties. Other
agreements did not disclose the amount a solicitor would be paid.
And lastly, some advisors did not require solicitors to
provide prospective clients with a copy of the adviser brochure and disclosure
documents.
#4
– Failure to maintain Solicitor Rule compliance.
OCIE staff observed that some advisors failed to ensure
that third-party referral agents were complying with the guidelines in the solicitor
agreements. In this review, the staff
also noted that advisors failed to provide any documentation to demonstrate an
attempt to maintain compliance with provisions.
The SEC also observed that some advisors failed to meet
its fiduciary duties under Sections 206(1) and 206(2) of the Advisers Act. In this assessment, advisors who recommended
service providers to clients, failed to fully and adequately disclose any of
its conflicts of interest.
Summary
The OCIE conducted several audits which provided the
basis for this risk alert and for its swift regulatory enforcement actions. In response to these infractions, some
advisors were given the option to amend their disclosure documents,
solicitation agreements, compliance policies and procedures, and/or their business
practices regarding the Cash Solicitation Rule.
The information is provided in hopes to encourage
investment advisors to review their compliance programs and gain more efficient
operations.
Compliance and Business Management
FIN Compliance (FinCompliance.io) is a
consortium of compliance services including: RIA Consults-Roberson Consults
Group, a compliance consulting firm, RIA Review, a compliance-management
software tool (SaaS), B-D Review, a RIA/Broker-Dealer compliance management
software tool, and FINLancer is a business
management portal featuring: E-signature tools; Invoicing integration,
Vendor Directory, continuity directory*, business client document portal, and
more (available by Q3 2019). Access all services
on one site: FINCompliance.io.
Impact
FIN Missions (FINmissions.com) provides business support group
sessions for other entrepreneurs. In addition, Cory has volunteered
for more than fifteen youth programs in locations such as like S. Korea, China,
S. Africa, Thailand, and India.
1 comment:
Hi!
Very informative article about SEC risk alert and compliance. You suggest finlancer for compliance management.I have seen the other firm that also offers compliance as a service and presents the online compliance tool.
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