OCIE Issues Risk Alert on Cash Solicitation Rule

The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (the “OCIE”) has issued, on October 31, 2018, a Risk Alert concerning compliance with the so-called Cash Solicitation Rule (Rule 206(4)-3 under the Investment Advisers Act of 1940 (the “Advisers Act”)).  The rule requires investment advisers required to be registered under the Advisers Act to comply with its requirements if they wish to pay a solicitor for soliciting clients.  The rule requires that an investment adviser has an agreement meeting certain requirements with a third-party solicitor, the solicitor must provide the potential client with certain disclosure documents on the adviser, the adviser must get an acknowledgement of receipt from the client before signing the client and the adviser must make a bona fide effort to ascertain the solicitor’s compliance with the agreement.  The Risk Alert indicates that the OCIE has run across violations of all of these requirements, including the disclosure documents.  To be clear, the SEC said in a no-action letter that it does not view the rule to apply to solicitation of investors for investment vehicles.