SEC Alerts Investment Advisers to Review Solicitor Arrangements

On October 31, OCIE issued a new Risk Alert for investment advisers with solicitor arrangements. The SEC periodically releases risk alerts to notify the industry of deficiencies they are finding during examinations, and this latest alert puts investment advisers with solicitor arrangements on notice to check their solicitor agreements, policies and procedures, and disclosure documents.

Key deficiencies cited in the alert include:

  • Solicitor disclosure documents – Third-party solicitors did not provide solicitor disclosure documents to prospective clients or provided disclosure documents that did not contain all required information.
  • Client acknowledgements – Advisers did not timely receive a signed and dated client acknowledgment of receipt of the adviser brochure and the solicitor disclosure document.
  • 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.
  • Bona fide efforts to ascertain solicitor compliance – No bona fide effort was made by the adviser to ascertain whether third-party solicitors complied with solicitation agreements and appeared to not have a reasonable basis for believing the solicitor was in compliance.

OCIE also noted related deficiencies under Advisers Act Rule 206(1) and 206(2) where firms recommended service providers to clients in exchange for client referrals without disclosing the conflict.

Firms with solicitor arrangements are encouraged to review the risk alert and should consider the following dos and don’ts:

Area of Focus DOs DON’Ts
 Solicitor disclosure document

Disclose the nature of the relationship, including any affiliation, between the solicitor and adviser

  Specify the actual compensation terms agreed upon in the solicitor arrangement

  Disclose any additional solicitation cost the client will be charged on top of the advisory fee

Χ Don’t use vague or hypothetical terms to describe the solicitor’s compensation.

 Client acknowledgement of   disclosure documents

  Include the client acknowledgement with the investment advisory contract and/or other new account paperwork

Make sure new business processing procedures include a step to check for a signed and dated client acknowledgement from solicited clients

Χ Don’t accept an investment advisory contract from solicited clients without a written acknowledgement of receipt of the firm’s disclosure documents

Χ Don’t accept client acknowledgements that are undated or dated after the client entered into the advisory contract

 Solicitation agreements

  Make sure the solicitor agreement includes an undertaking by the solicitor to perform its responsibilities consistent with instructions received by the adviser

  Describe the solicitor’s activities and compensation

  Require the solicitor to provide to clients and prospective clients a copy of the adviser’s Form ADV Brochure and the solicitor disclosure document

Χ Don’t pay fees to a solicitor without an executed solicitor agreement on file

 Ascertain solicitor compliance

  Regularly review solicitor practices for compliance with the solicitor agreement

  Have third-party solicitors complete an annual attestation of compliance with the solicitor agreement and Cash Solicitation Rule

  Periodically sample fee payouts to solicitors to ensure compensation disclosures continue to be accurate

Χ Don’t set it and forget it

 Form ADV disclosures

  Disclose in the Form ADV brochure any conflicts related to recommending service providers to clients in exchange for client referral

Χ Don’t use ambiguous language when disclosing conflicts arising out of solicitation arrangements.


Subscribe to CSS Blog

CSS frequently publishes blog posts which are written by our team from their observations in the field, at conferences and through experiences with compliance professionals. These posts are designed to further knowledge and share industry best practices. Topics run the gamut, including Form ADV, cybersecurity, MiFID II, position limit monitoring, technology challenges and more. Complete and submit the brief form below to receive notifications when we publish new content.

Latest Content

Texas Outlaws and a Silver Bullet: Position Limits in the USA

In this first installment on position limits, Regulatory Guidance expert Greg Hotaling surveys the current landscape of position limits imposed for U.S.-listed commodity derivative holdings, which can affect investment firms and other speculative investors regardless of where they are based. Stay tuned for coverage of EU position limits in the next edition. “Who shot J.R.?!” … Continued

FAQs From the Cyber Desk

Cybersecurity is a fast-moving target, so it is not uncommon for firms to have questions when it comes to assessing and understanding their cybersecurity risks. Here at CSS we receive a lot of cybersecurity questions, so we thought we would take the time to answer 10 of the most common Frequently Asked Questions. (1) What … Continued

EU Position Limits: Born in the USA?

This is the second installment of Regulatory Guidance Expert Greg Hotaling’s blog on position limits, this time addressing EU-listed commodity derivatives and related products.  As always, keep in mind that these limits can apply to asset managers, and other market participants, regardless of where they are based. In 2009, the European Union’s first comprehensive position … Continued