The SEC has clarified its position on the "Cash Solicitation Rule" saying that a registered investment adviser may compensate a person for soliciting investors for, or referring investors to his or her investment fund.

Usually, under the rule, it is illegal for an investment adviser to pay a cash fee, directly or indirectly, as the "Cash Solicitation Rule" only applies to solicitations of "clients."

But the SEC has taken the position that solicitations of investors for investment funds should not fall ito that category. The determination of whether the cash payment is being made solely to compensate that person for soliciting or referring investors will depend on the facts and circumstances of each particular case.

The SEC also warned that "Despite the additional guidance provided by the interpretative letter, investment advisers will need to continue to be mindful of potential traps for the unwary when entering into solicitation agreements."

Original SEC Release; SEC Loosens Ruling On Fund Solicitation Fees