Referral Fees

C is correct. Under the SEC Marketing Rule (compliance deadline November 4, 2022), ALL compensation arrangements with promoters/solicitors require written agreements and client disclosure, including non-cash arrangements like reciprocal referrals. The mutual benefit from cross-referrals constitutes compensation and creates a conflict of interest that must be disclosed in writing 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 any promoter/solicitor who receives compensation for referrals. This written agreement must document the terms of compensation, the nature of the relationship, and each party's obligations.

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. The Marketing Rule requires BOTH: (1) written disclosure to the referred client before or at the time of the referral explaining the relationship, compensation arrangement, and conflicts of interest, AND (2) disclosure of the referral arrangement in Form ADV Part 2A 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 individualized written disclosure to the specific referred client. The client receiving the referral must be informed in writing about the specific arrangement. C is insufficient because verbal disclosure does not meet regulatory requirements. All material conflicts must be disclosed in writing to satisfy fiduciary obligations and SEC rules. 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 EXCEPT answer). 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 written 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: Written disclosure to the referred client explaining the relationship, compensation, and conflicts must be provided before or at the time of the referral. D is required: Material referral arrangements must be disclosed in Form ADV Part 2A, which is provided to all clients and filed with the SEC.

B is correct. Statements 1, 2, and 3 are required under the Marketing Rule.

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: Written disclosure must be provided to each referred client before or 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: The referral arrangement must be disclosed in Form ADV Part 2A, 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: Third-party solicitors/promoters who refer clients but do NOT provide investment advice do not need to register as investment adviser representatives. The attorney is simply making referrals and receiving compensation, not providing investment advice, so IAR registration is not required. Only individuals who provide investment advice or manage accounts need to register as IARs.