![]() The conditions required by the Rule include the following: 1 Pursuant to the Rule, a federally registered investment adviser is prohibited from paying a cash fee, directly or indirectly, to a solicitor with respect to solicitation activities, unless certain conditions are observed. Rule 206(4)-3 of the Advisers Act (commonly referred to as “The Cash Solicitation Rule”) governs referral arrangements of investment advisers registered with the Securities and Exchange Commission. Regulations Governing Payment of Referral Fees As such, these relationships are regulated under the Investment Advisers Act of 1940 (the “Advisers Act”), as well as by various regulatory bodies and state laws. While these relationships allow for access to potential clients that may not have otherwise been found, it also creates a conflict of interest due to the financial motivation of the party referring those clients to the adviser. Some arrangements condition the payment of the referral fee upon the engagement of the potential client others merely play a fixed amount based on the ongoing referral of prospective clients. These arrangements typically involve the investment adviser paying a fee to an individual, or business, in return for the referral of potential clients. Recognizing this, investment advisers often form strategic relationships with other professionals by setting up referral programs in order to help promote and grow their respective businesses. Despite technology advances and access to social media, individuals still rely on those that they know and trust when determining where to go for the services they need. Ask any person in marketing or sales and they will tell you that the best way to advertise is, and always has been, by word of mouth.
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