The Investment Advisers Act of 1940 permits an IA to pay a fee to a person who solicits advisory clients only if these two conditions are met:
- The IA is registered with the SEC
- The solicitor has never been suspended, expelled, limited or barred from associating with an investment adviser by the SEC
If solicitation is permitted, the following rules apply:
- There must be a written agreement between the IA and the solicitor, which must require compliance with the Investment Advisers Act of 1940.
- The solicitor must provide a copy of the IA's disclosure document to the potential client at the time of solicitation.
- The solicitor must provide a separate disclosure document to the potential client that spells out: a) the name of the solicitor and the IA, b) the nature of the relationship between the two, c) a statement that the IA will pay the solicitor and d) the amount above the regular advisory fee the client will be charged due to the use of the solicitor.
- The IA must obtain a signed and dated acknowledgment from the client stating that he/she has received both the IA's and solicitor's disclosure documents by the time the advisory contract is entered into.
Exam Tips and Tricks
It\'s important to know the rules for both general advertising and performance advertising. You can expect fewer questions on advisory contracts and solicitations. Here is a question you might encounter on the exam:
Which of the following statements about IA advertising is FALSE under the Investment Advisers Act of 1940?
- A performance record may only be used if it contains a disclaimer on the first page that states there is no assurance that future results will be as good as the reported results.
- The IA may not advertise a formula without a disclaimer that refers to the limitations and difficulties of relying on any one formula or system.
- Testimonials may be used only if written consent has been obtained from the client and the testimonial is not misleading in any way.
- A performance record may be used only if the results are for at least one year.
The correct answer is "c". Testimonials may not be used in IA advertising.
InvestingLook at how Facebook's Instant Articles feature works, and how it differs from the new Accelerated Mobile Pages feature from Google and Twitter.
TechFind out why these number crunchers are part of every chief officer's dream team.
Financial AdvisorHere's how investment advisers can set up a compliance program that adheres to SEC requirements.
Financial AdvisorLearn the importance of having a financial adviser whom you can trust and why questioning the funds he selects is part of that process.
Financial AdvisorAs a financial advisor managing your client's assets is only part of the job; sometimes you have to manage your client, as well.
Managing WealthEffective communication and disclosures go a long way towards easing minds and creating a lasting and trusting symbiotic relationship. Here are the four steps to making good disclosures.
Financial AdvisorYou can't control how they react to the market, but you can help them understand the reality of the situation.
Financial AdvisorThese five tips will help financial advisors pass muster when the SEC comes knocking.
Financial AdvisorWhen joining the world of investment professionals, you must take the right exams.
Managing WealthInvestment managers should always act to benefit the client. Learn what actions managers should take on a client's behalf.