If you provide financial advice to your clients, either directly or through an investment advisory relationship, I urge you to review your policies, procedures and agreements as the rules change. The SEC's new trading rule (Rule 206(4))1, which went into effect 18 months ago and becomes mandatory on November 4, 2022, changes the way registered investment advisors calculate their fee for client referrals (aka referrals ) to manage. . such as "attorney contracts"). It's also changing how you can now take advantage of third-party support, certifications, and assessments.
As Chris Stanley, founding director of Beech Street Legal in University City, Missouri, told me at a recent forum, an "attorney" is someone who directly or indirectly solicits a client or refers a client to an attorney. . . "Customer acquisition and customer referrals are often used interchangeably, but they're actually two separate activities," says Stanley. "Solicitation" means engaging in sales activities to encourage a Client to work with a Consultant. “Recommendation” means introducing a client to an adviser even if the attorney does not solicit, encourage or recommend the adviser.
According to the SEC, "An individual may be an attorney under the rule if he or she provides an investment adviser with the name of a client, even if the client has not specifically advised the client to retain that adviser, because the mere recommendation is sufficient to trigger the case." of the Investment Advisor", although it is not a full complaint.
Keep going
Under the new rules, investment advisors can now supplement their ads with narrative testimonials and testimonials. Additionally, investment advisors can use more creative ways to engage and communicate with clients and investors, including oral presentations, video materials and social media. However, as part of these changes in client relationships, there are additional disclosure and record-keeping requirements designed to help clients, investors and regulators better understand an advisor's trading activities and controls.
As performance-based advertising continues to be a major area of focus for managers, the proliferation of credentials and incentives will create greater demand. The enhanced record-keeping requirements set out in the new Securities Act will increase the pressure on legal counsel, compliance and investor relations staff to maintain and prepare records of new communications.
Under the new law, recommendations (from non-clients) or testimonials (from clients), including payments for recommendations from investment advisor clients and recommendations from private equity investors, are permitted, but are subject to: (i) certain disclosure requirements; (ii) RIA has a reasonable basis as to whether the certification or representation complies with the Transactions Act; (iii) RIA has a written agreement with the Promoter (if fees above the Minimum Threshold are paid); and (iv) the Advertiser is not an “Unqualified Person” (if paying compensation in excess of the Minimum Threshold).
Until the new marketing law is enacted, advisors may not use "positive feedback" from clients (e.g. testimonials) or non-clients (e.g. recommendations) on their behalf, Stanley said. I'm psyched now
Apparently , the SEC notes that the testimony or affidavit expressly involves referral activity. "And this is what companies need to know about how they calculate [the marketing basis] in our referral relationship?" Stanley pointed out. “Are we engaged in activities called accreditation or licensing? How do we update our policies and procedures or agreements etc. to reflect this?” asked Stanley.
New rules for CPA investment advisor recommendations
For example, an informal relationship between a CPA and an investment adviser, in which client referrals are exchanged and no direct or indirect compensation is paid, will have a lower compliance burden than a formal relationship. or indirectly) pay to delay. If the provision of a lump sum payment, revenue sharing arrangement, valuable gift, or free investment advisory service to a designated CPA, compensation, or benefit is tied to (or dependent on) the delay, there is a greater compliance burden. There's inevitably a "gray area" where informal dinners or other events take place, Stanley said. "Professionals are always doing business. It is not customary to meet for dinner or pleasure trips. But if there is a clear [compensatory] relationship, money, bonuses or other benefits, they will be targeted. Falling into the trap of the law .. This is because the relationship Because it creates a conflict of interest.
That doesn't mean advisors can't send their clients Christmas gifts, reduce overall consultancy fees, or treat clients well and show their appreciation. The key, Stanley said, is that "you can't pay direct compensation if you're late." For example, if an advisor has a program that tells clients, "For every million dollars you refer us, I'll reduce your advisor's fee by five basis points." But there's nothing wrong with sending a nice basket of wine during the holidays. "If you think your prices are ahead of the market and you lower prices to put yourself in a more competitive position, that's perfectly fine," Stanley said. "But regulators are investigating the relationship between reward performance and referral generation."
Define specific rules
Most states include the advertising business as a business requiring licensing, registration and qualification as an agent of an investment adviser. This could include, for example, passing the Series 65 exam (or a professional exemption such as the CFP mark or CFA designation), registering an existing RIA as an IAR and filing a U4, or registering a new RIA with appropriate claims. and referral for reward activities.
However, not all jurisdictions consider internal or external advisers to be agents of an investment adviser (as defined by the relevant jurisdiction). Not all states require in-house or foreign attorneys to be licensed or registered. Missouri, for example, does not specifically require attorneys to register as agents of investment advisers. On the other hand, the state of California requires an attorney to be registered as an investment advisor representative, but the attorney does not have to qualify by owning a Series 65.
North Carolina effectively eliminates the concept of third party attorneys and requires attorneys to register as agents of investment advisers You search with RIA. In other words, all North Carolina attorneys must be in-house attorneys and appropriately registered or supervised.
Georgia excludes Georgian-licensed accountants and attorneys who solicit their current or legal clients on behalf of the RIA from the definition of investment advisor representative and has a “minimum threshold” that allows any resident of Georgia to file a petition on behalf of an RIA if the Number of referring customers is limited to 10 per year.
New Mexico exempts attorneys from registering as an investment adviser or investment adviser representative so long as they pay only a one-time registration fee.
Texas is an example of a state that clearly distinguishes between state-registered attorneys and SEC-registered attorneys, and in-house attorneys and outside attorneys. Texas-based attorneys should review the Texas State Securities Board's website for helpful FAQs on this subject.
For CPAs and investment advisors, you should take a close look at your existing referral agreements. Checking for non-compliance with qualification, licensing or registration requirements. And now it's time to make sure you're in good shape to be fully compliant with the new marketing law.