Securities Lawyer's Deskbook                          published by The University of Cincinnati College of Law

Rule 206(4)-3 -- Cash Payments for Client Solicitations

---

1. It shall be unlawful for any investment adviser required to be registered pursuant to section 203 of the Act to pay a cash fee, directly or indirectly, to a solicitor with respect to solicitation activities unless:
   
   
   1. 1. The investment adviser is registered under the Act;
         
         
      2. The solicitor is not a person (A) subject to a Commission order issued under section 203(f) of the Act, or (B) convicted within the previous ten years of any felony or misdemeanor involving conduct described in section 203(e)(2)(A) through (D) of the Act, or (C) who has been found by the Commission to have engaged, or has been convicted of engaging, in any of the conduct specified in paragraphs (1), (5) or (6) of section 203(e) of the Act, or (D) is subject to an order, judgment or decree described in section 203(e)(4) of the Act; and
         
         
      3. Such cash fee is paid pursuant to a written agreement to which the adviser is a party; and
         
         

      ---

      NOTE: The investment adviser shall retain a copy of each written agreement required by this paragraph as part of the records required to be kept under Rule 204-2(a)(10).
      

      ---

      
      
   2. Such cash fee is paid to a solicitor:
      
      
      1. With respect to solicitation activities for the provision of impersonal advisory services only; or
         
         
      2. Who is (A) a partner, officer, director or employee of such investment adviser or (B) a partner, officer, director or employee of a person which controls, is controlled by, or is under common control with such investment adviser: Provided, That the status of such solicitor as a partner, officer, director or employee of such investment adviser or other person, and any affiliation between the investment adviser and such other person, is disclosed to the client at the time of the solicitation or referral; or
         
         
      3. Other than a solicitor specified in paragraph (a)(2) (i) or (ii) of this section if all of the following conditions are met:
         
         
         1. The written agreement required by paragraph (a)(1)(iii) of this section: (1) Describes the solicitation activities to be engaged in by the solicitor on behalf of the investment adviser and the compensation to be received therefor; (2) contains an undertaking by the solicitor to perform his duties under the agreement in a manner consistent with the instructions of the investment adviser and the provisions of the Act and the rules thereunder; (3) requires that the solicitor, at the time of any solicitation activities for which compensation is paid or to be paid by the investment adviser, provide the client with a current copy of the investment adviser's written disclosure statement required by Rule 204-3 ("brochure rule") and a separate written disclosure document described in paragraph (b) of this rule.
            
            
         2. The investment adviser receives from the client, prior to, or at the time of, entering into any written or oral investment advisory contract with such client, a signed and dated acknowledgment of receipt of the investment adviser's written disclosure statement and the solicitor's written disclosure document.
            
            

            ---

            NOTE: The investment adviser shall retain a copy of each such acknowledgment and solicitor disclosure document as part of the records required to be kept under Rule 204-2(a)(15).
            

            ---

            
            
         3. The investment adviser makes a bona fide effort to ascertain whether the solicitor has complied with the agreement, and has a reasonable basis for believing that the solicitor has so complied.
            
            
2. The separate written disclosure document required to be furnished by the solicitor to the client pursuant to this section shall contain the following information:
   
   
   1. The name of the solicitor;
      
      
   2. The name of the investment adviser;
      
      
   3. The nature of the relationship, including any affiliation, between the solicitor and the investment adviser;
      
      
   4. A statement that the solicitor will be compensated for his solicitation services by the investment adviser;
      
      
   5. The terms of such compensation arrangement, including a description of the compensation paid or to be paid to the solicitor; and
      
      
   6. The amount, if any, for the cost of obtaining his account the client will be charged in addition to the advisory fee, and the differential, if any, among clients with respect to the amount or level of advisory fees charged by the investment adviser if such differential is attributable to the existence of any arrangement pursuant to which the investment adviser has agreed to compensate the solicitor for soliciting clients for, or referring clients to, the investment adviser.
      
      
3. Nothing in this section shall be deemed to relieve any person of any fiduciary or other obligation to which such person may be subject under any law.
   
   
4. For purposes of this section,
   
   
   1. Solicitor means any person who, directly or indirectly, solicits any client for, or refers any client to, an investment adviser.
      
      
   2. Client includes any prospective client.
      
      
   3. Impersonal advisory services means investment advisory services provided solely by means of (i) written materials or oral statements which do not purport to meet the objectives or needs of the specific client, (ii) statistical information containing no expressions of opinions as to the investment merits of particular securities, or (iii) any combination of the foregoing services.
      
      

	Notice to Users: The Deskbook is made available with the understanding that the University of Cincinnati College of Law is not engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. See Terms and Conditions of Use.   © Copyright 1998-2009, University of Cincinnati, All Rights Reserved  Contact: ronald.jones@uc.edu