SEC STAFF SAYS THAT FUND MANAGERS NEED NOT COMPLY WITH SOLICITATION RULE
In a recent No-Action Letter, the SEC staff took the position that a registered investment adviser that only manages pooled funds and pays cash solicitation fees to solicitors need not comply with the compensation disclosure requirements of Rule 206(4)-3. Bowing to its litigation defeat in Goldstein, the SEC indicated that if a hedge fund investor is not a client of the fund manager, it follows that cash solicitation to a referring agent cannot be cash solicitation to obtain advisory business. The SEC left open whether (a) the solicitor has an independent fiduciary obligation to disclose its compensation, (b) solicitors need to be registered representatives of broker-dealers, and (c) a fund manager must comply with the solicitation rule if it also offers separate account management.
OUR TAKE: We believe that hedge fund managers and their solicitors should continue to disclose the compensation paid and received whether or not the disclosure is specifically provided or required under the Solicitation Rule. The SEC could apply the anti-fraud rules of the Advisers Act and the Exchange Act even if the Solicitation Rule does not apply.