The SEC censured and fined an investment adviser for paying solicitors without complying with the solicitation rule (206(4)-3). The adviser had networking relationships with over 300 banks whereby the adviser paid the banks a substantial portion of the advisory fees received from clients referred to the adviser. The SEC asserts that the adviser did not comply with the solicitation rule, which requires separate disclosure about the solicitation relationship, the specific terms, and the compensation received. The adviser erroneously relied on a 1991 no-action letter, which stated that a bank need not register as investment adviser. The no-action letter did not hold that bank solicitors were exempt from the solicitation rule.
We had predicted that the SEC would bring cases alleging violations of the solicitation rule. The rule is intended to fully disclose the potential conflict of interest when a trusted adviser refers the client to an adviser that has provided a financial incentive. A solicitor need not be registered as an adviser under state or federal law to come within the rule.