Using solicitors--are you compliant? If you engage a solicitor's services, make sure you cover all your bases.
Although the rules governing solicitors differ from state to state, many states have indicated that individuals who refer prospective clients to an SEC advisor are not subject to investment advisor or investment advisor representative registration, or any other qualification requirements (e.g., investment-related designation, passing of exam), so long as the advisor complies with certain requirements.
First, solicitors are not subject to registration if advisors comply with Rule 206(4)-3, or the referral fee rule, under the Advisers Act. Rule 206(4)-3 requires a written agreement between the advisor and the solicitor that sets forth certain terms and conditions of the referral arrangement. The solicitor must provide the prospective client with a copy of the advisor's written disclosure statement at the time of the solicitation. The solicitor must also provide the client with a separate written disclosure document containing certain information pertaining to the solicitation arrangement, including a description of the solicitor's compensation. Finally, the advisor must obtain (and maintain for Rule 204-2 record-keeping purposes) a signed and dated document from the client acknowledging receipt of the disclosure statements. I recommend that the investment advisor agreement executed by the client contain such an acknowledgment.
Another exemption from registration for solicitors is that the solicitor must not be a supervised person of the advisor, such as a partner, officer, director or employee. Furthermore, the solicitor may not give investment advice on behalf of the advisor. Certain states that do permit such individuals to serve as solicitors without registration or qualification may not provide the same exemption for entities like CPA firms or insurance agencies. Thus, to the extent that an advisor seeks referral arrangements with professional firms in these states, he or she may opt to do so with the individual members thereof, rather than with the entity.
Because laws regulating solicitors differ on a state-by-state basis, it is important that advisors first determine if any corresponding filing, registration or qualification requirements are applicable to the advisor or the solicitor. Thereafter, for both regulatory and liability protection purposes, the roles and obligations of the parties should be set forth in a well-defined solicitation agreement, certain terms of which will differ depending upon the identity of the solicitor (e.g., an individual, another investment advisor, a broker-dealer).
On a federal level, if an SEC firm cannot demonstrate compliance with Rule 206(4)-3, the Commission could direct the firm to take certain actions, including, but not limited to, requiring the solicitor to provide the required disclosure to the client and obtain confirmation thereof, or cease making referral fee payments until the advisor can demonstrate compliance with the rule. States, on the other hand, can be much more punitive, including commencing an enforcement action against the advisor and the solicitor for failure to comply with the state's solicitor registration requirements.
Finally, during recent regulatory examinations (remember, the scope of the exam and depth of inquiry has substantially changed post-Madoff), the SEC is now requesting advisors demonstrate that the firm has made a "bona fide effort to ascertain whether the solicitor has complied" with the terms and conditions of the written agreement. As part of this enhanced examination inquiry, I recommend advisors develop a corresponding due diligence checklist to establish a procedure to confirm that the solicitor has discharged its obligations and to ascertain whether the solicitor remains in compliance state requirements.
Thomas D. Giachetti is chairman of the Securities Practice Group of Stark & Stark, a law firm with offices in Princeton, New York and Philadelphia that represents investment advisors, financial planners, BDs, CPA firms, registered reps and investment companies, and is a regular contributor to Investment Advisor. He can be reached at email@example.com.
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|Title Annotation:||THE COMPLIANCE COACH|
|Author:||Giachetti, Thomas D.|
|Date:||May 1, 2012|
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