Becoming An Investment Adviser: What Skills Do You Need?

Investment advisers often engage third parties such as accountants, attorneys, banks, broker-dealers, and other professionals to solicit new clients on their behalf. However, the Investment Advisers Act of 1940 prohibits advisers from paying a cash fee, either directly or indirectly, to a person who acts as a solicitor or finder. An exception to this rule is Rule 17 CFR Section 275.206(4)-3, which allows advisers to pay solicitors for bringing in clients if a long list of requirements are met. These requirements include having a written agreement between the adviser and solicitor, disclosing the arrangement to the client, and the solicitor adhering to the adviser's instructions and the Advisers Act. It's important to note that each state may have different requirements for solicitor arrangements, and advisers should be aware of the rules and regulations in their specific state.

Solicitors for investment advisers must adhere to the Investment Advisers Act of 1940, which prohibits cash fee payments to solicitors

Solicitors for investment advisers are subject to the provisions of the Investment Advisers Act of 1940, which is administered and enforced by the Securities and Exchange Commission (SEC). This federal statute sets out standards for investment advisers and defines them as any person or firm that is compensated for their services and engaged in providing investment advice, making recommendations, issuing reports, or furnishing analyses on securities.

The Act prohibits solicitors for investment advisers from receiving cash fee payments. Specifically, Rule 206(4)-3 of the Act states that investment advisers who must register under the Act are generally prohibited from paying cash fees, either directly or indirectly, to solicitors who bring in clients. This rule helps to prevent conflicts of interest and ensures that investors' interests are protected.

However, there is an exception to this prohibition. Rule 17 CFR Section 275.206(4)-3 allows investment advisers to pay cash fees to solicitors if a long list of stringent requirements is met. These requirements include the adviser being registered under the Act, the existence of a written agreement between the adviser and the solicitor, and the provision of specific disclosures to investors. The written agreement must also describe the solicitation activities and compensation, and the adviser must retain a copy.

The SEC's Office of Compliance Inspections and Examinations (OCIE) has identified frequent deficiencies in complying with this rule, including missing disclosure documents, incomplete disclosures, and missing client acknowledgments. Advisers and solicitors who fail to meet these requirements may be in violation of the prohibition on cash fee payments.

Solicitors are often third-party independents or in-house employees, and both are covered by the Solicitor Rule

The Solicitor Rule requires that the relationship between the investment adviser and the solicitor must be evidenced by a written agreement. This agreement must describe the solicitor's activities and the compensation they will receive for those activities. It also requires the solicitor to adhere to the investment adviser's instructions and the applicable laws and regulations, such as the Investment Advisers Act of 1940.

For third-party solicitors, there are additional requirements. The written agreement between the third-party solicitor and the investment adviser must include a description of the solicitation activities, the compensation to be received by the solicitor, and an undertaking by the solicitor to perform their duties in accordance with the adviser's instructions and applicable laws. The third-party solicitor must also provide the prospective client with the investment adviser's disclosure brochure and a separate written disclosure document before the solicitation occurs.

The investment adviser must also receive a signed and dated acknowledgment from the solicited client, confirming their receipt of the disclosure documents. Additionally, the investment adviser must make a bona fide effort to ensure that the third-party solicitor is complying with the terms of the agreement.

The Solicitor Rule is designed to protect investors from potential conflicts of interest and ensure that they receive appropriate advice and recommendations. It is important for investment advisers and solicitors to understand and comply with the requirements of the Solicitor Rule to avoid regulatory issues and ensure the best interests of their clients.

Solicitors must not be statutorily disqualified from receiving compensation for their role

• Be subject to an SEC order issued under Section 203(f) of the Advisers Act, which includes any order that censures, limits, suspends, or bars an individual.
• Have been convicted within the previous ten years of any felony or misdemeanour involving certain types of conduct, such as the purchase or sale of securities, bribery, perjury, theft, or embezzlement.
• Have been found by the SEC to have engaged in specific types of misconduct, such as making false or misleading statements or willfully violating securities laws.
• Be subject to certain types of orders, judgments, or decrees, such as being permanently or temporarily enjoined from acting as an investment adviser, broker, dealer, or in any other similar capacity.

These requirements ensure that solicitors are not restricted from receiving compensation due to past regulatory issues and helps to maintain the integrity of the investment advisory industry.

Solicitors must enter into a written agreement with the adviser, outlining their activities and compensation

Solicitors and investment advisers must enter into a written agreement that outlines the solicitor's activities and compensation. This is required by Rule 206(4)-3 of the Investment Advisers Act of 1940, which states that solicitors can only receive compensation for their activities if there is a written agreement in place between them and the adviser.

The written agreement between the solicitor and the adviser must include a description of the solicitor's activities and the compensation they will receive for those activities. It should also require the solicitor to adhere to the adviser's instructions and the provisions of the Investment Advisers Act. Additionally, the solicitor must provide the client with a copy of the adviser's client disclosure brochure and their own separate solicitor disclosure statement. The client must then sign and date the solicitor's disclosure statement, which the solicitor must maintain and make available to the adviser.

It is important to note that the requirements for solicitor arrangements may vary from state to state. For example, some states may require solicitors to register as investment adviser representatives, while others may have different definitions of what constitutes an "investment adviser representative". As such, it is crucial to review the specific rules and regulations of the relevant state when establishing a solicitor-adviser relationship.

Furthermore, there are different regulatory expectations for "in-house" solicitors, who are employees of the investment advisory firm, and third-party solicitors, who are independent of the firm. In-house solicitors may not have specific requirements from the SEC regarding the content of the written agreement, while third-party solicitors must include additional elements in their written agreements, such as a description of their solicitation activities and an undertaking to perform their duties consistently with the adviser's instructions and the Investment Advisers Act.

Overall, establishing a written agreement between solicitors and investment advisers is a crucial step in ensuring compliance with regulatory requirements and protecting the interests of all parties involved.

Solicitors are required to provide specific disclosures to prospective clients and may need to register as investment adviser representatives

According to Rule 206(4)-3 of the Investment Advisers Act of 1940, solicitors must enter into a written agreement with the client that outlines the solicitor's activities and compensation for those activities. This agreement must also require the solicitor to adhere to the adviser's instructions and the Advisers Act. Additionally, solicitors must provide the client with a copy of the adviser's client disclosure brochure and a separate solicitor disclosure statement. The solicitor must also obtain the client's signed and dated acknowledgment of receipt of these documents.

In addition to these disclosure requirements, solicitors may also need to register as investment adviser representatives. This requirement varies by state, and each state has its own rules and regulations regarding the licensing, registration, and qualification of investment adviser representatives. Some states, such as Missouri, do not require solicitors to register, while others, such as California and Texas, have specific requirements for solicitor registration.

It is important to note that the Investment Advisers Act of 1940 technically only applies to federally-registered investment advisers, not state-registered investment advisers. However, state-registered investment advisers must still comply with their respective state's rules and regulations regarding solicitor arrangements.

To ensure compliance with all applicable laws and regulations, solicitors should carefully review the relevant rules and regulations in their state and consult with legal and compliance experts as needed.

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