October 14, 2019

October 14, 2019

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OCIE Issues Risk Alert on the Cash Solicitation Rule

On October 31, 2018, the SEC’s Office of Compliance Inspections and Examinations (OCIE) published a risk alert relating to compliance issues regarding fees paid to persons who solicit clients for investment advisers in accordance with Rule 206(4)-3 under the Investment Advisers Act of 1940, known as the Cash Solicitation Rule. The risk alert identified the following types of deficiencies involving the Cash Solicitation Rule that OCIE most frequently identified in deficiency letters sent to advisers:

• Solicitor Disclosure Documents. OCIE observed advisers whose third-party solicitors did not provide disclosure documents to solicited clients that contained all the disclosure information required by the  Cash Solicitation Rule.

• Client Acknowledgments. OCIE observed advisers that did not timely receive client acknowledgments of receipt of the adviser’s Form ADV Part 2A and the solicitor disclosure document. OCIE also observed advisers whose client acknowledgments either were undated or received after the clients had already entered into an investment advisory agreement with the adviser.

• Solicitation Agreements. OCIE observed advisers that paid fees to a solicitor without having a valid solicitation agreement in place or pursuant to a solicitation agreement that did not contain provisions required under the Cash Solicitation Rule.

• Bona Fide Efforts to Ascertain Solicitor Compliance. OCIE observed advisers that did not make bona fide efforts to confirm that third-party solicitors complied with solicitation agreements, as required by the Cash Solicitation Rule.

• Conflicts of Interest. OCIE observed practices of advisers that may cause fiduciary duty concerns, for example, where advisers make service provider recommendations to clients in exchange for client referrals from the service provider without proper disclosure of the conflict of interest.

The risk alert also reminded advisers to implement written policies and procedures reasonably designed to  prevent deficiencies of the Cash Solicitation Rule and to review their policies, procedures and practices to promote improved compliance.

The risk alert is available at: https://www.sec.gov/ocie/announcement/risk-alert-investment-adviser-comp...

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Vedder Price P.C. attorneys provide a full range of services to a diverse financial services clientele. Attorneys practicing in the firm’s Investment Services Group are experienced in all aspects of investment company and investment adviser securities regulations, broker-dealer regulatory and compliance matters, derivatives and financial product matters, and ERISA and tax matters. Clients include mutual fund complexes, hedge and other private funds, money managers, broker-dealers, independent directors, and many other types of institutions such as banks, savings and loans,...