SEC Staff Issues Risk Alert Regarding Investment Adviser Compliance Issues Related to the Cash Solicitation Rule

November 1, 2018

On October 31, 2018, the SEC’s Office of Compliance Inspections and Examinations (OCIE) staff issued a Risk Alert regarding Rule 206(4)-3 under the Investment Advisers Act of 1940 (Cash Solicitation Rule).

Under the Cash Solicitation Rule, registered investment advisers are generally prohibited 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. In the Risk Alert, OCIE staff identified four of the most common issues in deficiency letters sent to investment advisers regarding the Cash Solicitation Rule.

Solicitor Disclosure Documents. Advisers’ third-party solicitors did not provide solicitor disclosure documents to prospective clients or provided solicitor disclosure documents that did not contain all the information required by the Cash Solicitation Rule.

Client Acknowledgments. Advisers did not timely receive a properly signed and dated client acknowledgment of receipt of the adviser brochure and the solicitor disclosure document.

Solicitation Agreements. Advisers paid cash fees to a solicitor without a solicitation agreement in effect or pursuant to an agreement that did not contain certain provisions required by the Cash Solicitation Rule.

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.

OCIE staff recommends that investment advisers review their practices and policies to ensure compliance with the Cash Solicitation Rule.


Categories

Compliance, Exchange-Traded Funds (ETFs), Investment Advisers, Investment Companies, Mutual Funds, Regulatory