In a recent interpretive letter, the Division of Investment Management clarified the scope of Rule 206(4)-3 under the Investment Advisers Act, sometimes called the cash solicitation rule. According to the SEC staff, “Rule 206(4)-3 generally does not apply to a registered investment adviser’s cash payment to a person solely to compensate that person for soliciting investors or prospective investors for, or referring investors or prospective investors to, an investment pool managed by the adviser.” The letter reverses the position taken in certain SEC staff no-action letters, suggesting that Rule 206(4)-3 applies to cash payments by registered advisers to persons who solicit investors to invest in investment pools.
Whether an adviser’s cash payment to a person is being made solely to compensate that person for soliciting investors or prospective investors for, or referring investors or prospective investors to, an investment pool managed by the adviser will depend upon all of the facts and circumstances of the particular case. In the staff’s view, the most pertinent facts and circumstances generally will be those relating to the following:
- The nature of the arrangement between the soliciting/referring person and the investment adviser.
- The nature of the relationship between the investment adviser and the solicited/referred person.
- The purpose of the adviser’s cash payment to the soliciting/referring person.
The SEC staff cautioned, however, that depending upon the facts and circumstances, a soliciting/referring person may be “advising others … as to the advisability of investing in … securities … and thus may be an investment adviser subject to Section 206 of the Advisers Act.” The staff was also careful to note that its letter does not address whether a person’s receipt of cash compensation from an adviser of an investment pool for soliciting or referring investors or prospective investors to invest in the pool would result in the person being considered a “broker” as defined under the Securities Exchange Act.