Do you use third-party solicitors to generate business?

This question assesses whether your firm's use of third-party solicitors adheres to applicable laws. Non-compliance with state or federal regulations for solicitor arrangements can result in significant regulatory penalties, client disputes, and reputational damage. For an insurer, a compliant firm demonstrates a strong risk management culture, while non-compliance indicates a major liability risk.

• What are "Federal Regulations"? For investment advisors, this primarily refers to the SEC's "Marketing Rule" (Rule 206(4)-1 under the Investment Advisers Act). This rule requires, among other things, a written agreement with the solicitor and specific disclosures to be made to the client about the arrangement.
• What are "State Regulations"? These are securities laws enforced by individual states. They can vary but often supplement federal rules, sometimes imposing additional requirements like the licensing or registration of the solicitors themselves.

To answer this, you must confirm that your agreements with third-party solicitors meet all legal requirements at both the federal and state levels. This includes:

• Written Agreements: Do you have a signed, written agreement with every solicitor?
• Client Disclosures: Do you provide clients with the required disclosures about the solicitor's role and compensation?
• Due Diligence: Do you have a process to ensure your solicitors are not disqualified from acting in this capacity (e.g., due to past securities violations)?
• State-Specific Rules: Are you compliant with the specific laws in every state where you operate?

If your arrangements meet all these standards, you can answer "yes." If you are not compliant with any one of these requirements, you must answer "no."

• Mistake: Assuming a written agreement is all that's required.
  • The SEC's Marketing Rule requires more than just an agreement. You must also provide specific disclosures to the client and perform due diligence on the solicitor.
• Pitfall: Ignoring state-level regulations.
  • "Blue sky" laws vary by state. An arrangement that is compliant with SEC rules might still violate a specific state's requirements if you are not careful.
• Mistake: Believing an informal referral arrangement doesn't need to be compliant.
  • As soon as compensation is involved for a referral, the arrangement falls under these regulations. There is no exception for "informal" agreements.

This question assesses whether your firm ensures transparency with potential clients regarding your solicitor relationships. A key part of managing the conflict of interest inherent in paid referrals is making sure the prospective client knows the solicitor is being compensated. Failure to disclose this arrangement is a significant regulatory violation and can lead to claims from clients who feel they were misled.

• What does "Evidence this arrangement" mean? This means the solicitor must clearly inform a prospective client that they have a business relationship with your firm and are being compensated for the referral. This disclosure must happen at the time of the solicitation so the prospect can factor the solicitor's potential bias into their decision-making process. The disclosure can be verbal, but a written disclosure provides better evidence of compliance.

To answer this question, you must confirm that your solicitors inform prospective clients about their referral arrangement with your firm.

• This is not just a best practice; it is a regulatory requirement under the SEC's Marketing Rule.
• You should have a process in place to ensure and verify that your solicitors are making this disclosure consistently.
• If you can confirm that this disclosure is always made, you can answer "yes."

If you do not have a process to ensure disclosure or are aware that it is not being done, you must answer "no."

• Mistake: Believing disclosure is only required after the client signs on.
  • This is incorrect. The disclosure must be made to the prospective customer before or at the time of the solicitation to be compliant. The purpose is to help them make an informed decision about whether to engage your firm.
• Pitfall: Assuming the solicitor is handling it without verification.
  • As the investment advisor, the compliance burden is on you. You must have a reasonable basis for believing your solicitors are making the required disclosures. Simply hoping they are is not sufficient.
• Mistake: Thinking a vague mention of the relationship is enough.
  • The disclosure should be clear and should include the nature of the relationship and the fact that the solicitor is being compensated.

This question helps the insurance carrier evaluate the scope of risk associated with your use of third-party solicitors by determining how many are engaged to generate business. A larger number of solicitors can indicate greater exposure to potential conflicts of interest and Errors and Omissions (E&O) claims related to unsuitable referrals or regulatory non-compliance. It provides a final data point to quantify the overall risk of this activity.

• Who counts as a "Solicitor"? For this question, you should count all distinct third-party individuals or entities (firms) that you currently have an agreement with—formal or informal—to refer clients to your advisory services for compensation. Do not include your own firm's employees.

To answer this, you need to provide the total number of external individuals or entities your firm currently works with to refer clients.

• Review your records and solicitor agreements to get an accurate count.
• If you have an agreement with a firm that has multiple people referring clients, that firm typically counts as one solicitor relationship.
• An exact number is preferred, but a reasonable, current estimate is acceptable if necessary.

• Mistake: Forgetting to count informal arrangements.
  • If you have an ongoing, informal agreement to pay someone for referrals, they should be included in your count even if the written contract is not robust.
• Pitfall: Providing a guess that is significantly inaccurate.
  • While an estimate is acceptable, a number that is drastically different from your actual records could be seen as a misrepresentation. It is best to do a quick review before answering.