SEC Charges Solicitor for Failing to Disclose Compensation under Solicitation Rule
In its recently amended complaint related to the Madoff case, the SEC charged a firm that solicited on behalf of Madoff with aiding and abetting violations of the Advisers Act’s solicitation rule even though neither Madoff nor the Defendant is a registered investment adviser. The SEC alleges that the solicitor acted as Madoff’s marketing arm and received large, undisclosed payments based on assets. In addition to charging the defendants with various violations of the anti-fraud rules, the SEC charged that the defendants “knowingly provided substantial assistance” to Madoff’s violations of Rule 206(4)-3, which requires an investment adviser to ensure that its solicitors disclose to solicited clients all compensation paid to the solicitor.
OUR TAKE: It has been unclear whether a solicitor could have liability under Rule 206(4)-3 for failing to ensure the disclosure required by the Rule, or whether the liability resides solely with the payor. The SEC argues that, through aiding and abetting, a solicitor can also have liability for not disclosing its compensation.