485A-502 Prohibited conduct in providing investment advice. (a) It shall be unlawful for a person that advises others for compensation, either directly or indirectly or through publications or writings, as to the value of securities or the advisability of investing in, purchasing, or selling securities, or that, for compensation and as part of a regular business, issues or promulgates analyses or reports relating to securities:

(1) To employ a device, scheme, or artifice to defraud another person; or

(2) To engage in an act, practice, or course of business that operates or would operate as a fraud or deceit upon another person.

(b) It shall be unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract, if the contract, in writing:

(1) Provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client;

(2) Fails to provide that no assignment, as defined in section 202(a)(1) of the Investment Advisers Act of 1940, of the contract shall be made by the investment adviser without the consent of the other party to the contract; or

(3) Fails to provide that the investment adviser, if a partnership, will notify the other party to the contract of any change in the membership of the partnership within a reasonable time after the change.

(c) Notwithstanding subsection (b)(1), an investment adviser may enter into, extend, or renew an investment advisory contract that:

(1) Provides for compensation based upon the total value of a fund averaged over a definite period, or as of definite dates, or taken as of a definite date; or

(2) Provides for compensation to the investment adviser on the basis of a share of capital gains or capital appreciation of the funds of the client; provided that the conditions and requirements as defined and set forth in rule 205-3 under the Investment Advisers Act of 1940 (17 C.F.R. 275.205-3) shall be met; and provided further that before entering into the advisory contract, and in addition to the requirements of Form ADV, the investment adviser shall disclose in writing to the client or the client's independent agent all material information concerning the proposed advisory arrangement, including the following:

(A) That the fee arrangement may create an incentive for the investment adviser to make investments that are riskier or more speculative than would be the case in the absence of a performance-based fee;

(B) Where relevant, that the investment adviser may receive increased compensation with regard to unrealized appreciation as well as realized gains in the client's account;

(C) The periods that will be used to measure investment performance throughout the contract and their significance in the computation of the fee;

(D) The nature of any index that will be used as a comparative measure of investment performance, the significance of the index, and the reason the investment adviser believes that the index is appropriate; and

(E) Where the investment adviser's compensation is based in part on the unrealized appreciation of securities for which market quotations are not readily available within the meaning of rule 2a-4(a)(1) under the Investment Company Act of 1940 (17 C.F.R. 270.2a-4(a)(1)), how the securities will be valued and the extent to which the valuation will be independently determined.

(d) It shall be unlawful for any investment adviser or investment adviser representative to:

(1) Fail to disclose to the client in a separate disclosure statement the capacity in which the investment adviser and investment adviser representative are acting and the compensation to be received in situations in which:

(A) The investment adviser is acting as principal for the investment adviser's own account and knowingly sells any security to or purchases any security from a client for whom the investment adviser is acting as investment adviser; or

(B) The investment adviser is acting as a broker-dealer for a person other than the client and knowingly effects any sale or purchase of securities, real estate, insurance contracts, annuities contracts, or any types of real or personal property for the account of the client; and

(2) Fail to provide the disclosure statement described in paragraph (1) and obtain the written consent of the client to the transactions described in the disclosure statement prior to the closing of the transactions.

(e) A rule adopted or order issued under this chapter may define an act, practice, or course of business of an investment adviser or an investment adviser representative, other than a supervised person of a federal covered investment adviser, as fraudulent, deceptive, or manipulative, and prescribe means reasonably designed to prevent investment advisers and investment adviser representatives, other than supervised persons of a federal covered investment adviser, from engaging in acts, practices, and courses of business that are fraudulent, deceptive, or manipulative.

(f) A rule adopted or order issued under this chapter may specify the contents of an investment advisory contract entered into, extended, or renewed by an investment adviser.

(g) It shall be unlawful for any investment adviser to use any scheme, device, or artifice to circumvent or attempt to circumvent the prohibitions or limitations in subsection (b).

(h) Nothing in this section shall be deemed to relieve any person of any fiduciary or other obligation to which such person may be subject under any law. [L 2006, c 229, pt of 1; am L 2012, c 54, 4]

 

 

Previous Vol11_Ch0476-0490 Next