A hedge fund manager, regardless of whether it is registered as an investment adviser, may engage solicitors, commonly referred to as third party marketers, to introduce prospective investors to the manager. A hedge fund manager may rely upon the pre-existing substantive relationships of the third-party marketers with whom they enter an agreement with in order to fulfill the pre-existing relationship requirement. Solicitors normally enter into a referral fee agreement with the manager, whereby the solicitor receives a monthly fee (presumably, for reimbursement of expenses), a percentage of the performance fee generated, if any, as well as the management fee, from any investor introduced to the manager by the solicitor. Although referral fee agreements may be terminated by either party, referral fee agreements usually require the sponsor to continue paying the solicitor the percentage of income generated from the performance and management fees charged to the investor introduced by the solicitor until such time that the investor no longer maintains an investment relationship with the manager.
In connection with soliciting investments in a hedge fund, solicitors are subject to the same legal limitations as the hedge fund manager and its employees and affiliates.
In order to receive compensation for having introduced an investor to a hedge fund manager, under both federal and state securities laws:
- Solicitors may need to be registered representatives of a registered broker-dealer; and
- The agreement governing the relationship between the hedge fund manager and the solicitor should be entered between the manager or an affiliate thereof, and the registered broker-dealer employing the solicitor.
A hedge fund manager should avoid posting information on a website maintained by a third party solicitor.