The staff of the SEC’s Division of Investment Management issued a no-action letter stating its view that Advisers Act Rule 206(4)-3, the cash solicitation rule (the “Rule”), generally does not apply when a registered investment adviser makes cash payments to a person solely to compensate that person for soliciting investors or prospective investors for, or referring them to, a fund the adviser manages (a “fund” being an investment pool that either is registered under the 1940 Act or excluded from the definition of investment company under Section 3(c) of the 1940 Act (e.g., a 3(c)(1) or 3(c)(7) fund)). The SEC staff had previously issued no‑action letters indicating that the Rule applied to a registered adviser that made cash payments to a party soliciting investors in the adviser’s funds. The current no‑action letter supersedes those letters to the extent of any conflict.
The current guidance indicates that the determination of whether or not the Rule applies to a solicitation arrangement depends on the particular facts and circumstances, with the most pertinent being those related to:
the nature of the arrangement between the soliciting/referring person and the investment adviser,
the nature of the relationship between the investment adviser and the solicited/referred person, and
the purpose of the adviser’s cash payment to the soliciting/referring person.
Under this analysis, the staff believes that the Rule “would not appear to apply to a registered adviser’s cash payment to a person for referring other persons to the adviser where the adviser manages only [funds] and is not seeking to enter into investment advisory relationships with other persons, and the adviser’s cash payment, under the adviser’s arrangement with the referring person, compensates the referring person solely for referring the other persons to the adviser as investors or as prospective investors in one or more of the [funds] managed by the adviser. In contrast, the Rule would appear to apply if the adviser manages or seeks to manage [funds] and individual accounts, is seeking to enter into investment advisory relationships with other persons, and the adviser’s cash payment, under the adviser’s arrangement with the referring person, compensates the referring person for referring the other persons as prospective advisory clients.”
The no-action letter expressly notes that when the Rule does not apply, a solicitor does not have to provide an investor or prospective investor with any of the documentation required by the Rule. The SEC staff later observes, however, that a solicitor’s activities may constitute “advising others … as to the advisability of investing in … securities,” thereby bringing the solicitor within the definition of investment adviser and subjecting it to the Section 206 requirement to disclosure to clients and prospective clients any material facts relating to conflicts of interest. (In the 1979 adopting release for the Rule, the SEC indicated that because the Rule contains a requirement for adviser oversight of an unaffiliated solicitor and an unaffiliated solicitor’s activities must be conducted in accordance with the agreement required by the Rule, an unaffiliated solicitor would be, with respect to solicitation activities under a solicitation agreement with an adviser, an associated person of that adviser. As a consequence, the solicitor would not be required to register under the Advisers Act solely as a result of those solicitation activities.)The no-action letter expressly states that it does not address the question of whether receiving cash compensation from an adviser for soliciting or referring investors or prospective investors to a fund would result in a solicitor’s being considered a “broker” under Section 3(a)(4) of the Securities Exchange Act of 1934, as amended.