September 30, 2015

CCO Series (2015) - Solicitation & Client Referrals

When a friend or colleague refers someone in need to your Registered Investment Advisor (“RIA”) firms you often want to do something kind in reply. But when you want to engage someone professionally to refer business for a cash payment, such as a percentage of that new client's revenue, you are pursuing a solicitor relationship. When engaging a solicitor to drum up new business, RIAs have to understand and comply with SEC and state rules. While these rules may differ, it's clear that the RIA is directly under the spotlight with these agreements, given that individuals who refer clients to an RIA are generally not required to be registered to do so, because the solicitor will be considered a "Supervised Person" of the RIA and subject to their compliance program.

Solicitation & Client Referrals In a Nutshell

Solicitor agreement requirements were implemented by the establishment of Rule 206(4)-3 for SEC-registered RIAs, and while the rules governing solicitors differ from state to state, many states follow suit. 206(4)-3 generally prescribes that individuals who refer prospective clients to an RIA are not subject to registration or any other qualification requirements, provided that the RIA complies with certain requirements.

Similar to the registration of Investment Advisor Representatives ("IARs"), solicitors may be required to register in the FINRA system with the state wherein they are operating or performing solicitation activities, but in most cases are exempt from the examination requirements of IAR registration.

RIA firms that do utilize solicitors are required to: (i) disclose any referral arrangements to Clients including compensation received and relationship to the Advisor; (ii) have a written agreement between the Advisor and the Solicitor that meets the requirements of the Adviser's Act; (iii) not have been convicted of a felony or misdemeanor within the past 10 years and other disciplinary exclusions from being a solicitor; and (iv) make an effort to ensure that Solicitors fulfill their obligations under the Adviser's Act.

Through the Regulator’s Eyes

With regard to solicitor agreements, regulators expect that you fully disclose this practice on your Form ADV, and you must comply with both SEC and state regulations regarding solicitors. When engaging with a solicitor, you are expected to have a written agreement with the solicitor to prescribe proper activities, establish policies and procedures to monitor for compliance with the agreement, verify any disciplinary disclosures related to the solicitor, and maintain proper books and records that demonstrate that you are meeting these requirements in accordance with the Adviser's Act.

CCO Best Practices

CCO’s of RIA’s have an obligation to disclose, document, and monitor solicitor activities. The best path is for CCO to review their solicitor policies and procedures of the compliance program, and be able to answer the following pertinent topics and questions:

  • Disclosure of Solicitor Agreements
    • Do all referred clients receive disclosures that notify them of solicitor arrangements?
    • Do they receive a copy of your Form ADV, Part 2?
    • How do you ensure that the solicitor provides prospective clients with these items?
  • Compensation
    • Does your firm compensate (via cash or non-cash payments) anyone other than an officer or employee of the firm for referring clients?
    • Does your firm direct (or appear to direct) client brokerage to any broker-dealers in exchange for client referrals?
  • RIA and Solicitor Relationship
    • Is the solicitor a related party? If yes, have you disclosed this affiliation to clients?
    • If arrangements are with an unaffiliated solicitor for personal advisory services, does the agreement contain a:
      • Description of the activities and the compensation; and
      • Requirement for the solicitor to perform his duties consistent with your instructions and provisions of the Investment Advisers Act of 1940 and rules?
  • Monitor solicitation activities
    • Are you supervising your solicitors to ensure they have complied with the agreement?
    • Are your solicitors providing disclosure statements to clients being referred?
    • Do your solicitors annually certify that they have no disciplinary matters to disclose?

The AdvisorAssist CCO Series is a collection of blog posts that cover each of the elements of your RIA's compliance program.  Each post will provide an overview of one compliance topic, including our insights on how regulators view each topic as well as some practical steps to help Chief Compliance Officers address this topic. As always, we would welcome your comments and thoughts.

Michael Conlon


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