OCIE recently issued a Risk Alert on common exam deficiencies in complying with the Cash Solicitation Rule, Rule 206(4)-3, of the Advisers Act. It is not surprising that OCIE decided to highlight referral arrangements since this is an area fraught with regulatory risk. So in addition to OCIE’s insights, we’ve included some other traps for the unwary.
OCIE reviewed deficiency letters from the past three years and cited four common mistakes:
1. Disclosure Documents Failure: Advisers make two common errors. The first is a failure to provide the disclosures required under Rule 206(4)-3 to clients. The second is providing incomplete disclosures.
2. Failure to Have Acknowledgements from Solicited Clients.
3. No Agreement or Inadequate Agreement. OCIE also found that advisers paid fees to solicitors without a written agreement, or using an agreement that did not contain the provisions required by the rule.
4. Failure to Check if Solicitor is Complying with the Agreement. Another common deficiency is the failure of an adviser to follow up to determine whether the solicitor is complying with the terms of the solicitation agreement.
OTHER TRAPS FOR THE UNWARY
In addition to the Risk Alert, we’ve pulled together a hit list of common issues faced by investment advisers when entering into referral arrangements.