SEC Staff Confirms that Hedge Fund Solicitors Are Not Subject to the Cash Solicitation Rule

As had long been expected, Securities and Exchange Commission (SEC) staff confirmed a few days ago that the SEC's cash solicitation rule, Rule 206(4)-3 (the Rule) under the Investment Advisers Act of 1940 (the Advisers Act), does not apply to a registered adviser’s cash payment to a person solely to compensate that person for soliciting investors or prospective investors for, or referring investors or prospective investors to, hedge funds and other pooled investment vehicles. The Rule prohibits a registered investment adviser from directly or indirectly paying a cash fee to a person who solicits on the adviser’s behalf, unless the solicitor is not subject to a court order or administrative sanction, and the fee is paid pursuant to a written agreement to which the adviser is a party.

Past SEC staff precedent had muddied the waters on this issue. The issue came under greater focus after the Washington, D.C. Circuit Court's ruling in Goldstein that hedge fund investors are not clients for purposes of the Advisers Act.

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