Compliance and Regulatory Alerts - 11-02-18

Alert: OCIE Recommends IAs Review Compliance Procedures on Cash-Based 3rd-Party Client Solicitation

On October 31st, the SEC Office of Compliance Inspections and Examinations issued a Risk Alert informing investment advisers, investors and other market participants of the most common compliance deficiencies related to the so-called Cash Solicitation Rule (Investment Advisers Act, Rule 206(4)-3).

The rule carves out exceptions to the general prohibition against paying a cash fee, directly or indirectly, to a third party solicitor who refers clients to an investment adviser. (For an SEC Division of Investment Management description of the rule obligations, see here under the section titled “Restriction on Payment of Referral Fees.”)

The Alert lists numerous deficiencies observed by OCIE staff during recent examinations, including, (i) a failure to secure third party solicitation agreements; (ii) inadequate – or failure to provide – disclosure to prospective clients; (iii) a failure to obtain written client acknowledgments of receipt of necessary disclosures; and (iv) failures to determine whether third party solicitors are complying with the required agreements.

Investment advisers should make sure that disclosure documents and solicitation agreements are in sync with the Cash Solicitation Rule and that compliance programs are reviewed and revised as necessary.

For more information concerning Bates Compliance Solutions, including addressing Cash Solicitation Rule deficiencies, please contact us by phone at (503) 670-7772 or email Robert Lavigne, Managing Director, Bates Compliance Solutions at rlavigne@batesgroup.com.

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