Client Communication and Compensation Issues - 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 advisor 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 the names of the solicitor and the IA, the nature of the relationship between the two, a statement that the IA will pay the solicitor, and the amount above the regular advisory fee that the client will be charged due to the use of the solicitor.

  • The IA must obtain a signed and dated acknowledgement from the client stating that he or she has received both the IA's and the solicitor's disclosure documents by the time the advisory contract is entered into.

Exam Tips and Tricks
It is 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?

  1. 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.
  2. 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.
  3. Testimonials may be used only if written consent has been obtained from the client and the testimonial is not misleading in any way.
  4. 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.

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