What is Referral Fees?

C is correct. Under the SEC Marketing Rule (compliance deadline November 4, 2022), a compensated endorsement generally requires a written agreement (unless the compensation is de minimis, $1,000 or less over the preceding 12 months) and disclosure to clients, and compensation includes non-cash benefits such as reciprocal referrals. The mutual benefit from cross-referrals is compensation and creates a conflict of interest that must be disclosed to clients.

A is incorrect because the Marketing Rule covers both cash and non-cash compensation, including reciprocal referral arrangements where both parties benefit. The absence of cash payments does not eliminate the disclosure requirement. B is incorrect because even if referrals benefit clients, the conflict of interest still exists and must be disclosed. Fiduciary duty requires transparency about all material conflicts regardless of whether clients benefit. D is incorrect because disclosure is required based on the compensation arrangement, not Sarah's registration status. Any person who receives compensation for referrals is considered a promoter/solicitor and triggers disclosure requirements.

B is correct. The SEC Marketing Rule requires a written agreement between the investment adviser and a compensated promoter, unless the compensation is de minimis ($1,000 or less over the preceding 12 months) or the promoter is a disclosed affiliate. The agreement must describe the scope of the agreed-upon activities and the terms of compensation for those activities.

A is incorrect because verbal agreements, even if documented in notes, do not satisfy the written agreement requirement under the Marketing Rule. Regulatory compliance requires formal written contracts. C is incorrect because while the old Cash Solicitation Rule (206(4)-3) required separate client acknowledgment forms, the current Marketing Rule (compliance deadline November 4, 2022) eliminated this separate acknowledgment requirement. Written disclosure is still required but not in the old acknowledgment form format. D is incorrect because Form ADV Part 2A disclosure is required in addition to (not instead of) the written agreement with the solicitor/promoter. Both are separate regulatory requirements.

B is correct. Two separate requirements apply: (1) under the Marketing Rule, disclosure to the referred client at the time of the referral stating that the promoter is not a client, that it is compensated, the material terms of the compensation, and any material conflicts of interest, and (2) under Form ADV Part 2A Item 14.B, disclosure of the referral arrangement in the brochure provided to all clients and filed with the SEC. Both forms of disclosure are mandatory.

A is insufficient because Form ADV disclosure alone does not satisfy the requirement for disclosure to the specific referred client at the time of the referral. C is insufficient because telling the client only the fee amount omits the other required disclosures (that the promoter is not a client, the material terms of the arrangement, and material conflicts of interest) and the Form ADV Part 2A disclosure. D is completely incorrect because industry standards or fee equivalency do not eliminate disclosure requirements. All referral fee arrangements must be disclosed regardless of amount or whether they are "standard."

C is correct (the exception). The SEC Marketing Rule (compliance deadline November 4, 2022) eliminated the separate client acknowledgment form requirement that existed under the old Cash Solicitation Rule (206(4)-3). While disclosure to clients is still required, it no longer needs to be in the form of a separate signed acknowledgment.

A is required: A written agreement between the adviser and solicitor/promoter documenting the compensation and terms is mandatory under the Marketing Rule. B is required: Disclosure to the referred client explaining the relationship, compensation, and conflicts must be made at the time of the referral. D is required: Form ADV Part 2A Item 14.B requires the adviser to describe the referral arrangement and the compensation in its brochure, which is provided to all clients and filed with the SEC.

B is correct. Statements 1, 2, and 3 are required: statements 1 and 2 under the Marketing Rule, and statement 3 under Form ADV Part 2A Item 14.B.

Statement 1 is true: A written agreement between the adviser and the attorney (acting as a promoter/solicitor) is required. This agreement must document the compensation structure, terms, and obligations of both parties.

Statement 2 is true: Disclosure must be provided to each referred client at the time of the referral. This disclosure must explain the relationship between the adviser and the attorney, the compensation arrangement (20% of first-year fees), and the potential conflicts of interest created by this arrangement.

Statement 3 is true: Form ADV Part 2A Item 14.B requires the adviser to describe the referral arrangement and the compensation in its brochure, which is the brochure provided to all clients and filed with the SEC. This ensures firm-wide transparency about compensation practices that create conflicts of interest.

Statement 4 is false: The Marketing Rule sets conditions on paying a promoter but does not require the promoter to register as an investment adviser representative. Whether a paid solicitor must register as an IAR is a separate question under state law, and the Uniform Securities Act definition of IAR includes an individual associated with an adviser who solicits, offers or negotiates for the sale of investment advisory services.