Section 032-515-14 - Dishonest and unethical practicesInvestment advisers and investment adviser representatives are fiduciaries and have a duty to act for the benefit of their clients. While the extent and nature of this duty varies according to the nature of the relationship between investment advisers or investment adviser representatives and their clients and the circumstances of each case, an investment adviser or investment adviser representative shall not engage in dishonest or unethical business practices. The practices listed below are examples of practices that may constitute grounds for discipline as "dishonest or unethical practices" under Section 16412 of the Act.
This section is not intended to be all inclusive, and thus practices not enumerated herein may also be deemed dishonest or unethical. This section is also not intended to limit or preclude application of the general anti-fraud provisions contained in Subchapter 5 of the Act against any person for practices similar in kind to those listed below.
To the extent that the conduct alleged constitutes fraud or deceit, the provisions of this section also apply to all other persons, in addition to investment advisers and investment adviser representatives, who advise 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 who, for compensation and as part of a regular business, issue or promulgate analyses or reports relating to securities.
A person may be deemed to have engaged in "dishonest or unethical practices" under Section 16412(4)(M) of the Act if the person has engaged in practices including but not limited to one or more of the following:
1. Recommending to a client, to whom 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.2. 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 ten (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.3. Inducing 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.4. Placing an order to purchase or sell a security for the account of a client without authority to do so.5. 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.6. Borrowing money or securities from a client unless the client is a broker-dealer, an affiliate of the investment adviser, or a financial institution engaged in the business of loaning funds.7. 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.8. Misrepresenting to any investment advisory client, or prospective investment advisory client, the qualifications of the investment adviser or any employee of the investment adviser, or misrepresenting the nature of the advisory services being offered or fees to be charged for such service, or omitting a material fact necessary to make any such representations not misleading in light of the circumstances under which they are made.9. Providing a report or recommendation to any investment advisory client prepared by someone other than the investment adviser without disclosing that fact. This prohibition does not apply to a situation where the investment adviser uses published research reports or statistical analyses to render advice or where an investment adviser orders such a report in the normal course of providing service.10. Charging a client an unreasonable advisory fee.11. Failing to disclose to clients in writing, before any advice is rendered, any material conflict of interest relating to the investment adviser or any of its employees which could reasonably be expected to impair the rendering of unbiased and objective advice, including: A. Compensation arrangements connected with advisory services to clients which are in addition to compensation from such clients for such services; andB. 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 investment adviser or its employees.12. Guaranteeing to a client that advice rendered will achieve a specific result, such as a gain or no loss.13. Publishing, circulating or distributing any advertisement that violates Section 6 of this chapter.14. Having custody of client funds or securities unless the investment adviser or investment adviser representative complies with the provisions of Section 11. 15. Entering into, extending or renewing any investment advisory 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, and that no assignment of such contract shall be made by the investment adviser without the consent of the other party to the contract.16. Failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information by the investment adviser, or any investment adviser representative or employee, taking into consideration the nature of the investment adviser's business.17. Entering into, extending, or renewing any investment advisory contract that violates the provisions of this sub-section. A. It is unlawful to enter into, extend or renew any investment advisory contract if the investment advisory contract: (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 in substance, that no assignment of such contract shall be made by the investment adviser without the consent of the other party to the contract; or(3) fails to provide, in substance, that the investment adviser, if a partnership, will notify the other party to the contract of any change in the membership of such partnership within a reasonable time after such change.B. Subparagraph A(1) shall not: (1) 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; and(2) apply to an investment advisory contract with a person who is not a resident of the United States.C. The Administrator, by rule, upon the Administrator's 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 Subparagraph A(1), if and to the extent that the exemption relates to an investment advisory contract with any person that the Administrator determines does not need the protections of Subparagraph A(1), 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 or investment adviser representative, and such other factors as the Administrator determines are consistent with this section.18. Including in an investment advisory contract, any condition, stipulation, or provisions binding a client to waive the investment adviser's compliance with any provision of the Act, this chapter or any other rule of the Office of Securities.19. Failing to protect the security and confidentiality of the non-public personal information of any client. 20. Failing or refusing to furnish a client, upon reasonable request, information to which the client is entitled, or to respond to a formal written demand or complaint.21. In connection with the offer, purchase or sale of a security, leading a client to believe that the investment adviser or investment adviser representative is in possession of material, non-public information that would affect the value of the security.22. Failing to comply with any securities-related arbitration award, unless a proceeding to vacate or modify such award is pending or unless the time limit to commence such a proceeding has not yet expired.23. Engaging in any act, practice, or course of business which is fraudulent, deceptive, or manipulative in violation of the Act, this chapter or any other rule of the Office of Securities.24. Engaging in conduct or any act, indirectly or through or by any other person, which would be unlawful for an investment adviser or investment adviser representative to do directly under the provisions of the Act, this chapter or any other rule of the Office of Securities.25. Engaging in conduct prohibited by Chapter 512 of the Rules of the Office of Securities.26. Accessing a client's account by using the client's own unique identifying information (such as username and password).02-032 C.M.R. ch. 515, § 14