QUESTION: If you pay someone a referral fee do they have to be registered? Can they be a client and also get paid a referral fee? I know this all has to be disclosed to clients but if you could help me on the rules.
RESPONSE: in nearly every state, if the investment adviser pays a referral fee to anyone, that individual or firm is required to register as a "solicitor" or an "investment adviser representative." On the exam, you'll probably get a question about a real estate professional or CPA who receives a referral fee in exchange for recommending that clients use the services of an investment adviser. If so, tell the test that this individual or firm should register as an investment adviser representative of that IA. In the real world, I believe there are five states that do not require solicitors to register--instead, they would hold the adviser responsible for the solicitor's activities. I believe Missouri is one of the five states with no registration requirement for solicitors. In that case, the adviser would simply need to be sure that the solicitor is not someone who has been disciplined by securities regulators, convicted of any felony or any securities-related misdemeanor in the past 10 years. The solicitor needs to deliver the adviser's ADV Part 2 (disclosure brochure) and also a copy of the solicitor's brochure that explains to the prospect the details of his relationship to the adviser. In most states the solicitor needs to be registered as a representative of the IA. In a handful of states, registration is not required.