Solicitors, the Marketing Rule, and Registration: Navigating Paid Referral Arrangements

Paid referral arrangements are common in the investment advisory space. RIAs often work with “solicitors” or “promoters,” who refer prospective clients in exchange for compensation. [FN 1] These include client referral firms, individual wholesalers, accountants, online adviser matching platforms, compensated bloggers, and other centers of influence that direct prospective clients to advisers. The defining feature of these relationships is that the promoter refers a prospective client to an RIA, and the firm pays a fee in exchange for the referral. 

When we think about these relationships, there are three distinct issues to consider: (1) What does the Marketing Rule require of an adviser that uses a solicitor? (2) If a solicitor is not a supervised person of the RIA, does the solicitor itself need to register as an RIA? (3) If a solicitor is a supervised person of the RIA, does the solicitor need to register as an IAR by virtue of that person’s solicitation activity? 

Marketing Rule Analysis

Under the SEC Marketing Rule, paid referrals are treated as advertising. When a current client promotes an adviser, that is called a “testimonial.” When a non-client promotes an adviser, that is called an “endorsement.” Both are regulated by the rule. The Marketing Rule sets forth the adviser’s obligations when it uses a paid promoter. Per Rule 206(4)-1(b), any testimonial or endorsement must include the following disclosures, which may be provided by either the firm or the promoter.

• The testimonial or endorsement must clearly and prominently disclose:

  • the testimonial was given by a current client or investor, or the endorsement was given by a person other than a current client or investor; 

  • cash or non-cash compensation was provided for the testimonial or endorsement, if applicable; and

  • a brief statement of any material conflicts of interest arising from the Firm’s relationship with the promoter.  

• In addition, the testimonial or endorsement must disclose: 

  • the material terms of any compensation arrangement with the promoter, including a description of the compensation provided; and 

  • any material conflicts of interest on the part of the person giving the testimonial or endorsement resulting from the investment adviser’s relationship with such person and/or any compensation arrangement. 

The firm must enter into a written agreement with any third-party promoter that describes the scope of activities and compensation, except if the promoter receives de minimis compensation. Also, the firm may not compensate any promoter who is an ineligible person or bad actor and disqualified by SEC action at the time the testimonial or endorsement is disseminated. Rule 206(4)-1(b).

An important exception to these obligations is when a testimonial or endorsement is provided by one of the firm’s “partners, officers, directors, employees, or a person that [is controlled by the firm], provided that the affiliation between the investment adviser and such person is readily apparent . . .” In other words, certain of these requirements do not apply when a supervised person of the firm engages in promotional activity on behalf of the firm. Rule 206(4)-1(b)(4)(ii). 

Although the Marketing Rule expressly contemplates paid solicitation activity and sets out the adviser’s resulting compliance obligations, it does not directly resolve the separate question of solicitor registration. That issue turns on the federal and state RIA and IAR registration framework.

Solicitor Registration

In the Adopting Release to the Marketing Rule, the SEC makes a few key points about the registration obligations of promoters. First, a promoter may be obligated to register as an investment adviser if the promoter is not already a supervised person of an RIA. Second, a promoter that is a supervised person of an RIA may need to be registered as an IAR. More specifically, here is the language of the Adopting Release on these points: 

• “A promoter may, depending on the facts and circumstances, be acting as an investment adviser within the meaning of section 202(a)(11) of the [Investment Advisers] Act. [That section defines an “investment adviser” broadly as a person who, for compensation, engages in the business of advising others about securities.] Investment adviser status and registration questions require analysis of the applicable facts and circumstances, including, for example, whether a person is ‘advising’ others. Commission staff previously stated that a person providing advice to a client as to the selection or retention of an investment manager . . . would be deemed to be ‘advising’ others . . .” 

• “Any promoter must determine whether it is subject to statutory or regulatory requirements under Federal law, including the requirement to register as an investment adviser pursuant to the Act and/or as a broker-dealer pursuant to section 15(a) of the Exchange Act, respectively.” [FN 2]

• “A promoter also must determine whether it is subject to certain state law and certain FINRA rules, including any applicable state licensing requirements applicable to individuals. To be clear, we are not making a presumption that a person providing an endorsement or testimonial meets the definition of investment adviser or broker dealer and must register . . . . Nor are we making a presumption that such person may or may not be an associated person of a registered investment adviser. Indeed, we agree that some promoters may meet the definition of associated person of an investment adviser depending on the facts and circumstances. Others may not. Under the final marketing rule, if an adviser determines that a person providing an endorsement or testimonial is an associated person, the adviser should have requisite control of such person.” 

The SEC’s position is that a solicitor who is not a supervised person of an RIA may have to register as an investment adviser if the solicitation activity entails advising clients about securities. By contrast, if the solicitor is a supervised person of the RIA, the question becomes whether the solicitor must register as an IAR under applicable state law. 

Simply put, when a solicitor works with an RIA, they can do so in one of two capacities: 

On one hand, they may work entirely outside the RIA as a sort of standalone business. For example, a center of influence, like an accounting practice, may refer clients to one or more RIAs. In that case, the accountant is likely not a supervised person of the RIA – the Investment Advisers Act defines “supervised person” as “any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of an investment adviser, or other person who provides investment advice on behalf of the investment adviser and is subject to the supervision and control of the investment adviser” – but the solicitor may have a standalone obligation to register as an RIA.

On the other hand, a solicitor may be a supervised person of an RIA for which the solicitor is soliciting clients. In this case, the Adopting Release makes clear that there would be no separate RIA registration obligation for the promoter – “If the promoter is a supervised person of the adviser for which it is providing a testimonial or endorsement, the promoter does not need to separately register with the Commission as an investment adviser solely as a result of his or her activities as a promoter” – but the promoter may be subject to IAR registration as a matter of state law. 

Investment Adviser Registration

The Investment Advisers Act defines an “investment adviser” as any person who, for compensation, engages in the business of advising others regarding securities. State securities laws, including the Uniform Securities Act, generally use similar definitions. 

From a registration standpoint, the general framework is that larger advisers – those with $100 million or more in AUM, advisers that would otherwise be required to register in 15 or more states, and certain internet advisers – are eligible to register with the SEC. By contrast, smaller advisers with less than $100 million in AUM generally must register with one or more state securities regulators rather than with the SEC. 

If a solicitor is “advising” others regarding securities and is not a supervised person of an RIA, then the solicitor may have an independent obligation under federal or state law to register as an investment adviser. In the Marketing Rule Adopting Release, the SEC cites earlier guidance to explain its position that providing advice to a client about the selection of an investment adviser may itself amount to investment advisory activity that triggers registration. 

Taking all this together, a solicitor may need to register as an investment adviser under federal or state law. A pure solicitor often will not have its own AUM, so SEC registration usually will not be available on an AUM basis. However, SEC registration may still be available if the solicitor otherwise would be required to register in 15 or more states, or if the solicitor is an internet adviser and qualifies for registration on that basis. Otherwise, the issue usually becomes one of state law. Many states use investment adviser definitions similar to the Advisers Act and focus on whether the solicitor is “advising” others about securities; if the solicitation amounts to giving investment advice, then the solicitor needs to register as an investment adviser under state law. 

While this reflects the Uniform Securities Act framework, some states address solicitors explicitly. For example, New York’s investment adviser regulations define a “solicitor” as a person who, “as part of a regular business, engages in the business of providing investment advice to the limited extent that such person receives compensation for introducing a prospective investor or investors to an investment adviser,” and New York then subjects solicitors to the same registration and examination requirements as investment advisers. 

By contrast, Pennsylvania provides an example of a state that expressly excludes certain solicitors from registration. The practical takeaway is that whether an unaffiliated promoter must register as an investment adviser is a state-by-state question, which is informed by both the general definition of the term “investment adviser” and any state-specific solicitor exemptions.

Investment Adviser Representative Registration

While that covers the landscape of firm-level RIA registration, IAR registration is handled at the state level and not by the SEC. The North American Securities Administrators Association (NASAA) explains that individual IARs generally must be registered in the states where they have a place of business, and SEC Rule 203A-3 defines “place of business” to include an office where the IAR regularly provides advisory services, solicits, meets with, or otherwise communicates with clients, as well as any location held out to the public for those purposes.

The Investment Advisers Act does not create a standalone federal IAR licensing regime. Instead, SEC Rule 203A-3 defines who counts as an IAR for purposes of allocating regulatory authority between the SEC and the states. In broad brushstrokes, an IAR is generally defined under that rule as a supervised person of the adviser, but the rule also provides that a supervised person is not an IAR if the person “does not on a regular basis solicit, meet with, or otherwise communicate with clients of the investment adviser, or provides only impersonal investment advice.” 

Thus, under the federal definition of Investment Adviser Representative, there is a recognition that soliciting clients is a hallmark of being an IAR: If an individual solicits clients for an RIA, they cannot be exempt from the definition of IAR. And if an individual is an IAR, then they may be subject to state IAR registration obligations. 

To be sure, IAR registration is ultimately a question of state law. While the federal definition clearly suggests that solicitation activity is a strong indicator that an individual is an investment adviser representative, whether the solicitor must actually register as an IAR depends on the law of the relevant states.

The 2002 Uniform Securities Act, which many states follow in whole or in part, defines an “investment adviser representative” as an individual who “receives compensation to solicit, offer, or negotiate for the sale of or for selling investment advice . . . .” The model act then makes it unlawful for an individual to transact business as an IAR without registration unless an exemption applies. 

Thus, a NASAA FAQ presents the following questions and answers: 

[Question:] I solicit clients for an investment adviser. Must I register? 

[Answer:] The Uniform Securities Act includes anyone ‘who solicits, offers, or negotiates for the sale of or sells investment advisory services’ within the definition of investment adviser representative, though there may be special solicitor registration provisions. Solicitors should check with all jurisdictions in which they will be doing business. 

[Question:] I will be getting basis points or referral fees for business I send to an investment adviser. Must I register?

[Answer:] As is the case with solicitors, state law often requires qualification and registration for individuals receiving referral fees or receiving a percentage of business from an investment adviser. Check with the applicable jurisdiction(s).

Under the model act, if an IAR has a place of business in a particular state and solicits clients for an RIA in the state, then the IAR may have a registration obligation in the state. Notably, the model act says that an RIA does not need to “employ or associate with” an IAR if the referral fee is paid by the RIA to another RIA or broker-dealer (which means the supervised person is already associated with a registered entity). See USA Section 404(f). 

While the above analysis is based on the model rule, we also see explicit requirements regarding solicitor registration in certain states. For example, New York investment adviser regulations define a “solicitor” as a person who, as part of a regular business, provides investment advice to the limited extent of receiving compensation for introducing prospective investors to an investment adviser or federally covered investment adviser. New York then states outright that solicitors are subject to the same registration and examination requirements as investment advisers, and that representatives of solicitors are subject to the same registration and examination requirements as investment adviser representatives.  

Along the same lines, a California FAQ provides the following guidance:

[Question:] I solicit clients for a registered investment adviser and receive referral fees. Do I have a registration obligation? 

[Answer:] Yes. Any California RIA that compensates an individual solicitor for client referrals is responsible for reporting such solicitor by filing a Form U4 on Web CRD. Note: The RIA must contact the Department to request restricted approval for solicitors.  

However, if the solicitor is an entity other than an individual, the solicitor will meet the definition of an investment adviser and must first seek registration as an investment advisory firm prior to accepting any compensation from client referrals.

Interestingly, California waives the examination requirements for certain solicitors, giving them a slight pass on the typical qualification requirements for an IAR: “Any investment adviser representative employed by or engaged by an investment adviser only to offer or negotiate for the sale of investment advisory services of the investment adviser may be exempt from the qualification requirements of section 260.236 of title 10 of the California Code of Regulations.”

To provide a contrasting approach to New York and California, Georgia law provides that certain compensated solicitors are excluded from IAR registration when specified conditions are met. As noted above, Pennsylvania law provides for something similar. 

Whose Obligation Is It?

When embarking on a solicitor relationship, an RIA may wonder who bears the burden of determining whether the solicitor is properly registered: Is it the firm, the solicitor, or both? While I haven’t seen specific SEC guidance squarely allocating responsibility for promoter registration, the Adopting Release and general regulatory principles point in a sensible direction. 

The Adopting Release states that a promoter must determine whether it is subject to federal registration requirements and applicable state licensing requirements. Thus, the obligation does not fall entirely on the RIA. At the same time, the release makes clear that, if the promoter is a supervised person of the RIA, then the adviser should have control over the supervised person. The Marketing Rule also requires the adviser to have a reasonable basis to believe that the compensated testimonial or endorsement complies with the rule itself (granted, the rule itself does not actually address registration). 

Combining these considerations with general regulatory principles, it seems reasonable to conclude that an unaffiliated promoter bears the primary burden of assessing its own RIA registration obligations, while each firm bears the direct burden of assessing IAR registration for its supervised persons. It’s a good practice for advisers should document their decisions regarding the IAR registration status of supervised persons. And prudent advisers may consider conducting and documenting reasonable diligence on any unaffiliated promoter’s claimed registration or exemption status (rather than simply taking the promoter’s word for it).

Conclusion

The clearest point is that a compensated solicitor relationship falls squarely within the Marketing Rule, which imposes straightforward requirements for solicitor relationships. However, the rule itself does not address the separate question of registration. 

For unaffiliated promoters, the question is whether the promoter’s solicitation activities rise to the level of “advising” others regarding securities, in which case standalone RIA registration may be required under federal or state law. For affiliated promoters, the question concerns state IAR registration: Do the states at issue require solicitors who are supervised persons to register as IARs?

The bottom line is that advisers should assume that every paid referral arrangement requires three separate reviews. First, the adviser must ensure compliance with the Marketing Rule (and provide the required Form ADV disclosures). Second, where the promoter is a supervised person of the adviser, the adviser must determine whether the promoter is required to register as an investment adviser representative under applicable state law. Third, where the promoter is acting independently of the adviser, prudent firms may choose to conduct due diligence into the promoter’s standalone registration obligations (if any). Without taking these steps, the referral arrangement and business development efforts may rest on a compliance defect.

[FN 1] Many readers will be familiar with the term “solicitor,” which is the older term, while the term “promoter” is the newer term introduced in the SEC’s Adopting Release to the Marketing Rule. 

[FN 2] Note that we do not reach the question of broker-dealer registration in this article, and are only looking at this from the standpoint of investment adviser registration.