Current through Register 2024 Notice Reg. No. 38, September 20, 2024
(a) It shall
constitute a fraudulent, deceptive, or manipulative act, practice or course of
business within the meaning of Section
25235 of the Code for any
investment adviser to fail to disclose to any client or prospective client all
material facts with respect to:
(1) A
financial condition of the adviser that is reasonably likely to impair the
ability of the adviser to meet contractual commitments to clients if (A) the
adviser has discretionary authority (express or implied) or custody over such
client's funds or securities, or (B) requires prepayment of advisory fees from
such client 6 months or more in advance; or
(2) A legal or disciplinary event that is
material to an evaluation of the adviser's integrity or ability to meet
contractual commitments to clients.
(b) It shall constitute a rebuttable
presumption that the following legal or disciplinary events involving the
adviser or a management person of the adviser (any of the foregoing being
referred to hereafter as "person") that were not resolved in the person's favor
or subsequently reversed, suspended, or vacated are material within the meaning
of subsection (a)(2) of this rule for a period of 10 years from the time of one
or more of the following events:
(1) A
criminal or civil action in a court of competent jurisdiction in which the
person:
(A) Was convicted, pled guilty or
nolo contendere ("no contest") to a felony or misdemeanor, or is the named
subject of a pending criminal proceeding (any of the foregoing referred to
hereafter as "action"), and such action involved:
(i) an investment-related business;
(ii) fraud, false statements, or
omissions;
(iii) wrongful taking of
property; or
(iv) bribery, forgery,
counterfeiting, or extortion;
(B) Was found to have been involved in a
violation of an investment-related statute or regulation; or
(C) Was the subject of any order, judgment,
or decree permanently or temporarily enjoining the person, or otherwise
limiting the person, from engaging in any investment-related
activity.
(2)
Administrative proceedings before the Securities and Exchange Commission, any
other federal regulatory agency, or any state agency (any of the foregoing
being referred to as "agency") in which the person:
(A) Was found to have caused an
investment-related business to lose its authorization to do business;
or
(B) Was found to have been
involved in a violation of an investment-related statute or regulation and was
the subject of an order by the agency (i) denying, suspending, or revoking the
authorization of the person to act in, or barring or suspending the person's
association with, an investment-related business; or (ii) otherwise
significantly limiting the person's investment-related
activities.
(3)
Self-Regulatory Organization ("SRO") proceedings in which the person:
(A) Was found to have caused an
investment-related business to lose its authorization to do business;
or
(B) Was found to have been
involved in a violation of the SRO's rules and was the subject of an order by
the SRO (i) barring or suspending the person from membership or from
association with other members, (ii) expelling the person from membership;
(iii) fining the person more than $2,500; or (iv) otherwise significantly
limiting the person's investment-related
activities.
(c)
The information required to be disclosed by subsection (a) shall be disclosed
to existing clients promptly and to prospective clients (A) not less than 48
hours prior to entering into any written or oral investment advisory contract,
or (B) no later than the time of entering into such contract if the client has
the right to terminate the contract without penalty within five business days
after entering into the contract.
(d) For purposes of this rule:
(1) "Management person" means a person with
power to exercise, directly or indirectly, a controlling influence over the
management or policies of an investment adviser, which is a company, or to
determine the general investment advice given to clients.
(2) "Found" means determined or ascertained
by adjudication or consent in a final SRO proceeding, administrative
proceeding, or court action.
(3)
"Investment-related" means pertaining to securities, commodities, banking,
insurance, or real estate (including, but not limited to, acting as or being
associated with a broker-dealer, investment company, investment adviser,
government securities broker or dealer, municipal securities dealer, bank,
savings and loan association, or other entity or person required to be
registered under the Commodity Exchange Act (7 U.S.C. 1 et seq.) or
other fiduciary).
(4) "Involved"
means acting or aiding, abetting, causing, counseling, commanding, inducing,
conspiring with or failing reasonably to supervise another in doing an
act.
(5) "Self-Regulatory
Organization" or "SRO" means those terms as defined in
17 CFR
275.206(4)-4(d)(5).
(e) For purposes of calculating the 10-year
period during which events are presumed to be material under subsection (b),
the date of a reportable event shall be the date on which the final order,
judgment, or decree was entered, or the date on which any rights of appeal from
preliminary orders, judgments, or decrees lapsed.
(f) Compliance with subsection (b) of this
rule shall not relieve any investment adviser from the disclosure obligations
of subsection (a) of this rule. Compliance with subsection (a) of this rule
shall not relieve any investment adviser from any other disclosure requirements
imposed on investment advisers by the Code or these rules.
1. New
section filed 5-12-92; operative 6-11-92 (Register 92, No. 20).
2.
Editorial correction of printing errors in section heading and subsection
(b)(2)(C) (Register 94, No. 2).
Note: Authority cited: Sections
25235(d)
and
25610,
Corporations Code. Reference: Section
25235(d),
Corporations Code.
