421-B:5-502 Prohibited Conduct in Providing Investment Advice. –
(a) Fraud in providing investment advice. It is unlawful for any 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) Supplemental provisions.
(1) It shall constitute a fraudulent or deceptive act, practice, or course of business within the meaning of subsection (a) for any investment adviser registered or required to be registered to fail to disclose to any client or prospective client all material facts with respect to:
(A) a financial condition of the investment adviser that is reasonably likely to impair the ability of the investment adviser to meet contractual commitments to clients, if the investment adviser has discretionary authority (express or implied) or custody over such client's funds or securities, or requires prepayment of advisory fees of more than $500 from such client, 6 months or more in advance; or
(B) a legal or disciplinary event that is material to an evaluation of the adviser's integrity or ability to meet contractual commitments to clients.
(2) A person who is an investment adviser or investment adviser representative is a fiduciary and has a duty to act primarily for the benefit of the person's clients. While the extent and nature of this duty varies according to the nature of the relationship between an investment adviser and the clients and the circumstances of each case, an investment adviser or investment adviser representative shall not engage in unethical business practices which constitute violations of subsection (a), including the following:
(A) Recommending to a client to whom investment supervisory, management, or consulting services are provided the purchase, sale, or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the client on the basis of information furnished by the client after reasonable inquiry concerning the client's investment objectives, financial situation and needs, and any other information known by the investment adviser or investment adviser representative.
(B) Exercising any discretionary power in placing an order for the purchase or sale of securities for a client without obtaining written discretionary authority from the client within 10 business days after the date of the first transaction placed pursuant to oral discretionary authority, unless the discretionary power relates solely to the price at which, or the time when, an order involving a definite amount of a specified security shall be executed, or both.
(C) Introducing trading in a client's account that is excessive in size or frequency in view of the financial resources, investment objectives, and character of the account in light of the fact that an adviser in such situations can directly benefit from the number of securities transactions effected in a client's account. Subsection (b)(2)(B) appropriately forbids an excessive number of transaction orders to be induced by an investment adviser or investment adviser representative for a client's account.
(D) Placing an order to purchase or sell a security for the account of a client without the authority to do so.
(E) Placing an order to purchase or sell a security for the account of a client upon instruction of a third party without first having obtained a written third party trading authorization from the client.
(F) Borrowing money or securities from a client unless a client is a broker-dealer, an affiliate of the investment adviser, or a financial institution engaged in the business of loaning funds.
(G) Loaning money to a client unless the investment adviser is a financial institution engaged in the business of loaning funds or the client is an affiliate of the investment adviser.
(H) Misrepresenting to any advisory client, or prospective advisory client, the qualifications of the investment adviser, investment adviser representative, or any employee of the investment adviser, or misrepresenting the nature of the advisory services being offered or fees to be charged for such services, or omitting to state a material fact necessary to make the statements made regarding qualifications, services or fees, in light of the circumstances under which they are made, not misleading.
(I) Providing a report or recommendation to any advisory client prepared by someone other than the investment adviser or investment adviser representative without disclosing that fact. This prohibition does not apply to a situation where the investment adviser or investment adviser representative uses published research reports or statistical analysis to render advice or where a representative orders such a report in the normal course of providing service.
(J) Charging a client an unreasonable advisory fee.
(K) Failing to disclose to clients in writing before any advice is rendered any material conflict of interest relating to the investment adviser, investment adviser representative, or any of its employees which could reasonably be expected to impair the rendering of unbiased and objective advice. including:
(i) Compensation arrangements connected with advisory services to clients which are in addition to compensation from such clients or such services; and
(ii) Charging a client an advisory fee for rendering advice when a commission for executing securities transactions pursuant to such advice will be received by the adviser or its employees.
(L) Guaranteeing a client that a specific result will be achieved, such as gain or no loss, with advice which will be rendered.
(M) Publishing, circulating, or distributing any advertisement which does not comply with Rule 206(4)-1 under the Investment Advisers Act of 1940, 17 C.F.R. 275.206(4)-1.
(N) Disclosing the identity, affairs, or investments of any client unless required by law to do so, or unless consented to in writing by the client.
(O) Taking any action, directly or indirectly, with respect to those securities or funds in which any client has any beneficial interest, where the investment adviser or investment adviser representative has custody or possession of such securities or funds when the adviser's action is subject to and does not comply with the requirements of Rule 206(4)-2 under the Investment Advisers Act of 1940, 17 C.F.R. 275.206(4)-2.
(P) Entering into, extending, or renewing any investment adviser contract unless such contract is in writing and discloses, in substance, the services to be provided, the term of the contract, the advisory fee, the formula for computing the fee, the amount of prepaid fee to be returned in the event of contract termination or non-performance, whether the contract grants discretionary power to the investment adviser or investment adviser representative, and that no assignment of such contract shall be made by the investment adviser without the written consent of the other party to the contract.
(Q) Entering into, extending, or renewing any investment adviser contract that 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.
(i) Subsection (b)(2)(Q) shall not:
(a) be construed to prohibit an investment advisory contract which 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
(b) apply to an investment advisory contract with a person (except a trust, governmental plan, collective trust fund, or separate account), provided that the contract relates to the investment of assets in excess of $1,000,000, if the contract provides for compensation based on the asset value of the company or fund under management averaged over a specified period and increasing and decreasing proportionately with the investment performance of the company or fund over a specified period in relation to the investment record of an appropriate index of securities prices or such other measure of investment performance as the secretary of state by rule may specify.
(ii) Subsection (b)(2)(Q) shall not be deemed to prohibit an investment adviser from entering into, performing, renewing, or extending an investment advisory contract that provides for compensation to the investment adviser on the basis of a share of the capital gains upon, or the capital appreciation of, the funds, or any portion of the funds, of a client, provided that the client entering into the contract subject to subsection (b)(2)(Q) is a qualified client defined as any one of the following persons:
(a) A natural person who or a company that immediately after entering into the contract has as least $750,000 under the management of the investment adviser.
(b) A natural person who or a company that the investment adviser entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract, either:
(1) has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $1,500,000 at the time the contract is entered into; or
(2) is a qualified purchaser as defined in the Investment Company Act of 1940, 14 U.S.C. 802-a(a)(51)(A), at the time the contract is entered into.
(c) A natural person who immediately prior to entering into the contract is:
(1) an executive officer, director, trustee, general partner, or person serving in a similar capacity, of the investment adviser; or
(2) an employee of the investment adviser (other than an employee performing solely clerical, secretarial or administrative functions with regard to the investment adviser) who, in connection with his or her regular functions or duties, participates in the investment activities of such investment adviser, provided that such employee has been performing such functions and duties for or on behalf of the investment adviser, or substantially similar functions or duties for or on behalf of another company for at least 12 months.
(d) The secretary of state, upon his or her own motion, or by order upon application, may conditionally or unconditionally exempt any person or transaction, or any class or classes of persons or transactions, from subsection (b)(2)(Q), if and to the extent that the exemption relates to an investment advisory contract with any person that the secretary of state determines does not need the protections of subsection (b)(2)(Q), on the basis of such factors as financial sophistication, net worth, knowledge of and experience in financial matters, amount of assets under management, relationship with a registered investment adviser, and such other factors as the secretary of state determines are consistent with subsection (b)(2).
(R) Failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information in violation of section 204A of the Investment Advisers Act of 1940.
(S) Entering into, extending, or renewing any advisory contract which would violate section 205 of the Investment Advisers Act of 1940. This provision shall apply to all investment advisers and investment adviser representatives registered or required to be registered under this chapter.
(T) Indicating, in an advisory contract, any condition, stipulation, or provisions binding any person to waive compliance with any provision of this chapter or of the Investment Advisers Act of 1940 or any other practice that would violate section 215 of the Investment Advisers Act of 1940.
(U) Engaging in any act, practice, or course of business which is fraudulent or deceptive in contravention of section 206(4) of the Investment Advisers Act of 1940, notwithstanding the fact that such investment adviser is not registered or required to be registered under section 203 of the Investment Advisers Act of 1940.
(V) Engaging in conduct or any act, indirectly or through or by any other person, which would be unlawful for such person to do directly under the provisions of this chapter or any rule adopted under it.
(3) The conduct set forth in subsection (b)(2) is not inclusive. Engaging in other conduct such as nondisclosure, incomplete disclosure, or deceptive practices, shall be deemed an unethical business practice. The federal statutory and regulatory provisions referenced in subsection (b)(2) shall apply to investment advisers and investment adviser representatives, regardless of whether the federal provision limits its application to investment advisers subject to federal registration.