Risk Alert: Investment Adviser Compliance Issues Related to the Cash Solicitation Rule

The SEC issued a Risk Alert on October 31, 2018 to provide investment advisers, investors and other market participants with information concerning the most common deficiencies related to the Cash Solicitation Rule.  The alert discusses the requirements for using a third-party solicitor and includes the most frequent deficiencies identified by OCIE staff:

  • Solicitor disclosure documents – did not provide solicitor disclosure documents to prospective clients or the solicitor disclosure documents did not contain all the information required such as:
    • Disclose the nature of the relationship, including any affiliation, between solicitor and adviser
    • Contain terms of compensation arrangement between the adviser and the solicitor
    • Specify the actual compensation terms agreed to in the solicitation agreement and instead used vague or hypothetical terms to describe the solicitor’s compensation
    • Specify additional solicitation cost the solicited client will be charged in addition to the advisory fee
  • Client acknowledgements – did not timely receive a signed and dated client acknowledgement of receipt of the adviser brochure and the solicitor disclosure document. Also observed that client acknowledgements were undated or dated after the clients had entered into an investment advisory contract.
  • Solicitation agreements – cash fees were paid to a solicitor without a solicitation agreement in effect or pursuant to an agreement that did not contain certain specific provisions, such as:
    • Contain an undertaking by the solicitor to perform its duties under the solicitation agreement in a manner consistent with the instructions of the adviser
    • Describe the solicitor’s activities and the compensation to be paid
    • Oblige solicitors to provide clients (including prospective clients) with a current copy of the adviser brochure and the solicitor disclosure document
  • Bona fide efforts to ascertain solicitor compliance – advisers did not make a bona fide effort to ascertain whether third-party solicitors complied with solicitation agreements and appeared to not have a reasonable basis for believing that the third-party solicitors so complied. Advisers were unable to describe any efforts they took to confirm compliance with solicitation agreements.

OCIE also observed advisers with similar conflicts may implicate other provisions of the Advisers Act, for example, advisers recommended service providers to clients in exchange for client referrals without full and fair disclosure of the conflicts of interest.

 

OCIE encourages advisers to review their practices, polices and procedures in these areas to promote improvements in adviser compliance programs.

Link To Risk Alert

 

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