Although the Cash Solicitation Rule was incorporated in part in the Marketing Rule, there are lessons to be learned from a recent enforcement action. On August 22, 2023, the SEC settled charges against a Registered Investment Adviser (RIA) based in Washington, D.C. The RIA made cash payments to over two hundred social media influencers and publishers of online newsletters to solicit clients for the RIA. The SEC’s order alleged that the RIA did not comply with the Cash Solicitation Rule the was in effect at the time of the compliance violations.
The RIA’s clients were not fully informed of the content creators’ financial interests in promoting the firm’s investment advisory services and real estate investment platform. Therefore, investors lacked the information they needed to evaluate the content creators’ recommendation of the firm. In addition, the RIA did not adopt and implement written policies and procedures that were reasonably designed to prevent violations of the Cash Solicitation Rule.
The press release and enforcement action are available at the following LINK.
Summary of RIA’s solicitation violations
Beginning in February 2016, the RIA contracted with content creators to promote the firm’s online real estate investment platform on their blogs, websites, newsletters, and social media channels. As part of these contractual arrangements, the content creators agreed to include hyperlinks to the RIA’s platform in their online promotions.
The RIA paid fees to the content creators based on the number of individuals who clicked on the hyperlinks and gave their email addresses. Some of these individuals ultimately signed advisory contracts with the RIA.
The RIA paid more than $8 million to over 200 content creators, who referred more than 66,000 new clients to the adviser. To date, those clients accounted for more than $300 million of the RIA’s assets under management and paid over $655,000 in advisory fees to the firm. The RIA made these payments to the content creators without the disclosure and documentation required by the Cash Solicitation Rule. The RIA’s agreements with the content creators did not require them to perform their duties in a manner consistent with the Investment Advisers Act and its rules.
The agreements also did not require the content creators to provide the following documents to clients at the time of solicitation:
- Among other items, a written disclosure document describing the nature of their relationship with the RIA and the terms of their compensation arrangement; and
- The RIA’s brochure.
The content creators did not supply the clients solicited with the required written disclosure document. Furthermore, the RIA failed to obtain written acknowledgement that clients received the written disclosure document before entering into advisory contracts.
Clients were not fully informed about the content creators’ financial interests in promoting the RIA’s online real estate platform and investment advisory services. Therefore, clients lacked the information needed to evaluate the content creators’ recommendation of the RIA. In addition, the RIA failed to adopt and implement written policies or procedures concerning the use of solicitors.
The SEC found that the RIA willfully violated Section 206(4) of the Investment Advisers Act and the now defunct, Cash Solicitation Rule. The RIA also willfully violated Section 206(4) of the Investment Advisers Act and Rule 206(4)-7 thereunder, which is better known as the Compliance Rule. The RIA agreed to a $250,000 civil penalty, a cease-and-desist order, and censure to settle the charges.
Takeaways
Though the Cash Solicitation Rule no longer exists, this case sends the message that the SEC will always be on the lookout for inappropriate attempts by RIAs to solicit clients. As examiners scour the internet for unusual marketing activity, they are very likely to notice a high volume of content about a particular RIA. Examiners may look closely at the relationship between the RIA and social media influencers, as well as publishers.
The Marketing Rule now addresses solicitation activity. In general, RIAs will need to have a written agreement in place where they advertise any compensated third-party endorsements and testimonials. Keep in mind that bad actors will usually not be permitted to be compensated for endorsements or testimonials. The Marketing Rule preserved the requirement that clients and prospects be informed about the material terms of any compensation arrangement.
As RIAs strive to increase their visibility on the internet, they need to be sure their marketing efforts are compliant. A day before this case was released, the SEC announced sanctions against a FinTech investment adviser that advertised the annualized performance returns of its crypto strategy. The RIA claimed those returns were as high as 2,700 percent. While those returns certainly caught the attention of investors, they also put the RIA on the SEC’s radar. That case can be reviewed HERE.
About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Delray Beach, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.
RIA Compliance Group, LLC – 701 SE 6th Ave, Suite 201, Delray Beach, FL 33483 – Tel: 561-600-0564 – sales@ria-compliance.com
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