10 Pa. Code § 404.012 - Cash payment for client solicitation

(a) An investment adviser's failure to comply with the requirements of this section concerning cash payments for client solicitation constitutes a fraudulent, deceptive or manipulative act, practice or course of business, within the meaning of section 404 of the act (70 P.S. § 1-404).

(b) An investment adviser may not pay a cash fee or other economic benefit, directly or indirectly, to a solicitor with respect to solicitation activities unless:

(1) The investment adviser is registered under the act.

(2) The solicitor is registered as an investment adviser representative or is exempt from registration under § 302.071 (relating to registration exemption for solicitors) or qualifies for another exemption under the act.

(3) The cash fee or other economic benefit is paid under a written agreement to which the investment adviser is a party.

(4) The written agreement required under paragraph (3):

(i) Describes the solicitation activities to be engaged in by the solicitor on behalf of the investment adviser and the compensation to be received therefor.

(ii) Contains an undertaking by the solicitor to perform its duties under the agreement in a manner consistent with the instructions of the investment adviser and the provisions of the act and the rules thereunder.

(iii) Requires that the solicitor, at the time of any solicitation activities for which compensation is paid or to be paid by the investment adviser, provide the prospective client with a current copy of the following:

(A) The investment adviser's written disclosure statement required under § 404.011 (relating to investment adviser brochure disclosure).

(B) A separate written disclosure document which contains all of the following:

(I) The name of the solicitor.

(II) The name of the investment adviser.

(III) The nature of the relationship, including any affiliation, between the solicitor and the investment adviser.

(IV) A statement that the solicitor will be compensated for the solicitation services by the investment adviser.

(V) The terms of the compensation arrangement, including a description of the compensation paid or to be paid to the solicitor.

(VI) The amount, if any, for the cost of obtaining his account the prospective client will be charged in addition to the advisory fee, and the differential, if any, among clients with respect to the amount or level of the advisory fees charged by the investment adviser if the differential is attributable to the existence of any arrangement under which the investment adviser has agreed to compensate the solicitor for soliciting prospective clients for, or referring prospective clients to, the investment adviser.

(5) The investment adviser receives from the prospective client before, or at the time of, entering into any written or oral investment advisory contract with the prospective client, a signed and dated acknowledgment of receipt of the investment adviser's written disclosure statement required under § 404.011 and the solicitor's written disclosure document required under paragraph (4)(iii)(B).

(c) For purposes of subsection (b)(5), this section does not apply to an investment adviser as follows:

(1) If the cash fee is paid to a solicitor with respect to solicitation activities for the provision of impersonal investment advisory services only.

(2) If the cash fee is paid to a solicitor who is either of the following:

(i) A partner, officer, director or employee of the investment adviser.

(ii) A partner, officer, director or employee of a person which controls, is controlled by, or is under common control with the investment adviser if the status of the solicitor as a partner, officer, director or employee of the investment adviser or other person, is disclosed to the client at the time of the solicitation or referral.

(d) This section does not relieve a person of a fiduciary or other obligation to which the person may be subject under the law.

Notes

10 Pa. Code § 404.012

The provisions of this § 404.012 adopted September 1, 2000, effective 9/2/2000, 30 Pa.B. 4551; transferred and renumbered from 64 Pa. Code § 404.012, December 14, 2012, effective 12/15/2012, 42 Pa.B. 7533; amended January 12, 2018, effective 1/13/2018, 48 Pa.B. 389.

The provisions of this § 404.012 issued under sections 404(a) and 609(a) of the Pennsylvania Securities Act of 1972 (70 P.S. §§ 1-404(a) and 1-609(a)); amended under section 202.C of the Department of Banking and Securities Code (71 P.S. § 733-202.C); section 609(a) of the Pennsylvania Securities Act of 1972 (70 P.S. § 1-609(a)); and section 9(b) of the Takeover Disclosure Law (70 P.S. § 79(b)).

This section cited in 10 Pa. Code § 102.021 (relating to definitions); 10 Pa. Code § 302.071 (relating to registration exemption for solicitors); and 10 Pa. Code § 304.012 (relating to investment adviser required records).