Client Communication and Compensation - Solicitation
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
- 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:
- 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.