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Investment Adviser Guide

Solicitors

    § Sec. 551.403(a), Wis. Stats., deems it unlawful for any person to transact business as an investment adviser representative unless registered or exempt. § DFI-Sec 1.02(5)(c), Wis. Adm. Code, defines “transact business” to include soliciting any person to become a client of the person on whose behalf the solicitation is made.

    § DFI-Sec 1.02(8), Wis. Adm. Code, defines "solicitor" as "…any individual, person, or entity who, directly or indirectly, receives a cash fee or any other economic benefit for soliciting, referring, offering or otherwise negotiating for the sale or selling of investment advisory services to clients, including prospective clients, on behalf of an investment adviser." SEC Release No. IA-1633 states that a person who is an investment adviser representative of an investment adviser; a person who is not under the direct supervision of an investment adviser and does not provide investment advice on behalf of the adviser; or a person who is not regulated or not required to be regulated by the U.S. Securities & Exchange Commission remains subject to state regulation. For example, a person who does not have to register federally would still need to comply with the Wisconsin securities statutes and rules which require a solicitor to register before contacting potential clients in the state.

    Solicitors define their functions and relationships based upon the myriad of models and business plans that exist in the advisory world. Therefore, it is the underlying nature of a person’s service or function that determines how they should be qualified and registered. As a point of reference only, SEC rule § 275.206(4)-3(d)(3) defines impersonal advisory services as follows: "(3) Impersonal advisory services means investment advisory services provided solely by means of

    (i) written materials or oral statements which do not purport to meet the objectives or needs of the specific client,
    (ii) statistical information containing no expressions of opinions as to the investment merits of particular securities, or
    (iii) any combination of the foregoing services. (Secs. 204, 206, and 211 of the Advisers Act [15 U.S.C. 80b-4, 80b-6 and 80b-11(a)])"

    Wisconsin rules parallel the federal rule with respect to written disclosure documents and contractual obligations of investment advisers and solicitors. (See 17 C.F.R. § 275.206(4)-3) However, it should be noted that Wisconsin rules differ slightly from the federal rule regarding who has the contractual obligations and disseminates the disclosure documents. The rules eliminate the ability of an investment adviser to pay any solicitor compensation without the written disclosure documents and contractual obligations in place and disseminated as prescribed section § DFI-Sec 5.06(25), Wis. Adm. Code. The only exception is if the solicitor is a partner, officer, director or employee of such investment adviser; or a partner, officer, director or employee of a person that controls, is controlled by, or is under common control with such investment adviser, provided the status of the solicitor is disclosed to the client at the time of the solicitation or referral.

    The following is an illustration of the difference between a solicitor who provides personal advisory services and one who provides impersonal advisory services as part of a solicitation, assuming all appropriate documents are in place and being disseminated appropriately.

Personal Advisory Services:

    • The solicitor has 3 investment advisers that he solicits for:
      -> Adviser A handles fixed income securities;
      -> Adviser B handles mutual funds; and
      -> Adviser C handles equities.
      -> The solicitor finds an individual that has inherited 1 million dollars,
          and based upon their discussions it is clear to the solicitor that the individual needs and wants
          fixed income securities, and refers the individual to Adviser A.

Impersonal Advisory Services:

    • The solicitor has 3 investment advisers that he solicits for:
      -> Adviser A handles fixed income securities;
      -> Adviser B handles mutual funds; and
      -> Adviser C handles equities.
      -> The solicitor makes no inquiry and has no information from other sources
          (from an insurance, accounting or tax preparation relationship, for example) about the prospect’s
          financial situation or investment needs.
      -> The solicitor says: "Here are the three advisers that I solicit for, the choice is yours,
          good luck and let me know how it works out."

    As illustrated in the examples, defining the function is of key importance in defining if the solicitor is acting in an impersonal manner regarding specified solicitation activity.

Registration required

    § DFI-Sec 5.06(25), Wis. Adm. Code, deems it an unethical business practice for an adviser to pay any form of compensation to a solicitor unless:

    • the adviser is:
      -> is a state registered investment adviser, or
      -> registered as an investment adviser representative, or
      -> exempt from registration as provided for in section DFI-Sec 5.13(2), Wis. Adm. Code; and
    • the solicitor has not been the subject of certain civil or criminal actions; and
    • the fee is paid pursuant to a written agreement between the adviser and the solicitor that
          sets forth the solicitation arrangement, including the compensation formula.

    If a solicitor reviews a prospect’s financial situation, investment objectives and other information in order to determine which investment adviser would be appropriate for that prospect, or whether a single investment adviser’s investment philosophy or strategy would be suitable for the prospect, the solicitor must be registered as an investment adviser or an investment adviser representative and therefore subject to any qualification examination or other requirements that an investment adviser or an investment adviser representative would be subject to. However, if a solicitor provides only impersonal advisory services and has not been the subject of any disciplinary action designated in § DFI-Sec 5.13(2), Wis. Adm. Code, or receives an order of the administrator waiving the registration requirement, the rule provides an exemption from registration.

Disclosure documents

    § DFI-Sec 5.06(25), Wis. Adm. Code, requires that the written disclosure document include certain information about the solicitation relationship and that the document be given to the prospective client. The rule tracks the disclosure requirements of federal brochure rule 206(4)-3 under the Investment Advisers Act of 1940, regarding cash payments for solicitation activity, with the noted exception that the Division rule eliminates the ability of an investment adviser to pay any solicitor compensation without the written disclosure documents and contractual obligations in place and disseminated as prescribed in the rule.

Registration exemptions

    § DFI-Sec 5.13(2), Wis. Adm. Code, provides an exemption from the investment adviser representative registration requirement (and therefore the examination requirement) for solicitors providing impersonal advisory services only, as discussed above, under specified conditions. Subsection (a) of that rule limits the solicitor’s activities to "…activities that are impersonal in nature…" as illustrated in the foregoing examples. Please follow this link to read the complete list of conditions for this exemption.

    Even if the person receives a waiver by order of the Administrator, all of the written disclosure documents and contractual obligations must be in place and disseminated as proscribed by the other elements of the rule.