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:
  1. 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.
Compensation

Related Articles
  1. Investing

    How Google & Twitter Compete with Facebook's Instant Articles (FB, GOOG)

    Look at how Facebook's Instant Articles feature works, and how it differs from the new Accelerated Mobile Pages feature from Google and Twitter.
  2. Managing Wealth

    7 Signs Of A Charitable Disaster Scam

    Make sure you know where your donations are going, and where they can be most effective.
  3. Financial Advisor

    RIAs: Watch the SEC’s Advertising Reg Fine Print

    Advisors need to understand the SEC's advertising rules to avoid potential liability and enforcement actions.
  4. Financial Advisor

    Retirement Plan Advisors: Here's What the SEC Expects

    Here's what the SEC looks for when advisors align clients' suitability with investments.
  5. Financial Advisor

    How Advisors Can Create Compliance Programs

    Here's how investment advisers can set up a compliance program that adheres to SEC requirements.
  6. Financial Advisor

    Losing a Client Is Not Always The End of The World

    Losing a client is never pleasant for a financial advisor, but sometimes this is a better outcome than continuing the relationship.
  7. Financial Advisor

    Manage Your Clients' Expectations

    You can't control how they react to the market, but you can help them understand the reality of the situation.
  8. Managing Wealth

    Asset Manager Ethics: Acting In the Benefit of Clients

    Investment managers should always act to benefit the client. Learn what actions managers should take on a client's behalf.
  9. Financial Advisor

    5 Traits the Best Financial Advisors Share

    Discover what the best financial advisers share in terms of the traits they possess, and learn what clients value most in their advisers.
  10. Financial Advisor

    3 Reasons to Fire Your Advisor

    There is no reason for a client to stay with a financial advisor who is not serving his or her needs. Here are some red flags to look out for.
Frequently Asked Questions
  1. Absolute P/E Ratio Vs. Relative P/E Ratio

    The difference between absolute P/E and relative P/E is easier when you know why each term is used.
  2. Why Do a Reverse Merger Instead of an IPO?

    Reverse mergers are often the most cost-efficient way for private companies to trade publicly.
  3. How Do Speculators Profit From Options?

    Options are a risky game, but you can learn speculators' tricks to use them to your advantage.
  4. What is the difference between a debenture and a bond?

    Debentures and bonds can both be used to raise capital, but debentures are typically issued to raise short-term capital.
Trading Center