Current through Register Vol. 50, No. 9, March 1, 2024
RELATES TO: KRS Chapter 292,
17 C.F.R.
275.206(4),
15 U.S.C.
78,
80b
NECESSITY, FUNCTION, AND CONFORMITY:
KRS
292.500(3) authorizes the
commissioner of the Department of Financial Institutions to promulgate
administrative regulations necessary to carry out the provisions of KRS Chapter
292. KRS
292.336(7) and (8) authorize
the commissioner to promulgate administrative regulations prohibiting
unreasonable charges or other compensation of investment advisers and
prescribing standards for the conduct of business by investment advisers and
investment adviser representatives which the commissioner finds appropriate in
the public interest and for the protection of investors. This administrative
regulation establishes requirements concerning dishonest and unethical
practices by investment advisers and investment adviser representatives and
clarifies the consequences of engaging in unacceptable conduct or
practices.
Section 1. Definitions.
(1) "Advertisement" means any notice,
circular, letter, or other written communication addressed to more than one (1)
person, or any notice or other announcement in any electronic or paper
publication, by radio or television, or by any other medium, that offers any
one (1) of the following:
(a) Any analysis,
report, or publication concerning securities;
(b) Any analysis, report, or publication that
is to be used in making any determination as to when to buy or sell any
security or which security to buy or sell;
(c) Any graph, chart, formula, or other
device to be used in making any determination as to when to buy or sell any
security, or which security to buy or sell; or
(d) Any other advisory service regarding
securities.
(2)
"Investment adviser solicitor" means a person or entity that, directly or
indirectly, solicits a prospective client for, or refers a prospective client
to, an investment adviser.
Section
2.
A person who is an investment adviser or an investment adviser
representative shall be a fiduciary and shall have a duty to act primarily for
the benefit of the person's clients. An investment adviser or investment
adviser representative shall not engage, either directly or indirectly, in
unethical or dishonest practices. The following acts and practices shall
constitute a breach of fiduciary duty or a dishonest and unethical practice,
and violations may result in a fine, suspension, or revocation in proportion to
the seriousness of the offense:
(1)
Recommending to a client to whom investment advisory, 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 based on 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;
(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 considering that an
investment adviser or investment adviser representative may directly benefit
from the number of securities transactions effected in a client's
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 or securities 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)
(a) Misrepresenting to any advisory client,
or prospective advisory client, the qualifications of the investment adviser or
any employee of the investment adviser;
(b) Misrepresenting the nature of the
advisory services being offered or fees to be charged for the service;
or
(c) 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 were made, not
misleading;
(9) Providing
a report or recommendation to any advisory client prepared by someone other
than the adviser without disclosing that fact;
(10) Charging a client an unreasonable
advisory fee in light of the fee charged by other investment advisers providing
similar services;
(11) Failing to
disclose to clients in writing before any advice is rendered any material
conflict of interest relating to the adviser, or any of its employees,
including:
(a) Compensation arrangements
connected with advisory services to clients which are in addition to
compensation from these clients for advisory services; or
(b) The amount of any commissions to be
received for executing transactions pursuant to advice given;
(12) Failing to disclose to
clients in writing all potentially conflicting divisions of loyalty in
connection with a transaction, and failing to obtain the written consent of the
client to proceed with the transaction in accordance with the following
requirements:
(a) Any transaction in which a
person acts as an investment adviser for one (1) party to that transaction and
in which the person (or any person controlling, controlled by, or under common
control with the adviser) acts as a broker-dealer for both the advisory client
and another person on the other side of the transaction shall be subject to
this disclosure and consent requirement, and the client shall be provided a
written confirmation for each transaction, which contains the following:
1. A statement of the nature of the
transaction;
2. The date of the
transaction;
3. An offer to
furnish, upon written request, the time of the transaction; and
4. The source and amount of any other
remuneration the adviser received or will receive in connection with the
transaction. If the investment adviser is not participating in a distribution
when the advisory client is purchasing the security or a tender offer when the
advisory client is selling the security, the confirmation may state that the
investment adviser has been or will be receiving other remuneration and that
the source and the amount of this remuneration will be furnished upon the
client's written request;
(b) The disclosure and consent requirements
of subsection (12)(a) of this section apply to each contemplated transaction
and shall be complied with every time the transaction occurs unless the adviser
complies with the provisions of subsection (12)(c) of this section;
(c) If the disclosure and consent
requirements of subsection (12)(a) of this section prospectively cover more
than one (1) transaction, the adviser is responsible for ensuring that the
client receives at least annually, with or as part of a written statement or
summary of the client's account, written disclosure of the following:
1. The total number of these transactions
since the date of the last statement or summary;
2. The total amount of all commissions or
other remuneration the adviser received or will receive in connection with the
transactions; and
3. A conspicuous
statement that the client may revoke the written consent previously given by
providing written notice of the revocation to the adviser; and
(d) Any transaction in which the
same adviser recommended the transaction to both a seller and a purchaser of a
security shall be a dishonest or unethical practice regardless of any
disclosure and consent;
(13) Failing to disclose to clients in
writing before any advice is rendered any material fact with respect to the
financial and disciplinary information required to be disclosed by
17 C.F.R.
275.206(4)-4 (SEC Rule
206(4)4);
(14) Guaranteeing a
client that a specific result will be achieved with advice which will be
rendered;
(15) Using any
advertisement that does the following:
(a)
Refers to any testimonial of any kind concerning any advice, analysis, report,
or other service rendered by the adviser or representative unless it meets the
following requirements:
1. The testimonial
clearly discloses whether the person giving the testimonial is a client or
promoter;
2. The testimonial
clearly discloses whether the person giving the testimonial is
compensated;
3. An adviser or
representative using a testimonial provided by a promoter has entered into a
written agreement with a promoter; and
4. The adviser or representative and
testimonial comply with all provisions of
17 C.F.R.
275.206(4)-1 Rule 206(4)-1
of the Investment Advisers Act of 1940, commonly known as the SEC marketing
rule, effective December 22, 2020;
(b) Refers to past specific recommendations
of the adviser or representative that were or would have been profitable,
except that an adviser or representative may furnish or offer to furnish a list
of all recommendations made by the adviser or representative within the
immediately preceding period of not less than one (1) year if the list also
includes the following:
1. The name of each
security recommended, the date and nature of each recommendation, the market
price at that time, the price at which the recommendation was to be acted upon,
and the most recently available market price of each security; and
2. A legend on the first page in prominent
print or type that states that recommendations made in the future may not be as
profitable as the securities on the list;
(c) Represents that any graph, chart,
formula, or other device being offered can in and of itself be used to
determine which securities to buy or sell, or when to buy or sell
them;
(d) Represents that any
graph, chart, formula, or other device being offered will assist any person in
making that person's own decisions without prominently disclosing in the
advertisement the limitations and the difficulties with respect to its
use;
(e) Represents that any
report, analysis, or other service will be furnished for free or without
charge, unless the report, analysis or other service actually is or will be
furnished free and without any direct or indirect condition or
obligation;
(f) Represents that the
Department of Financial Institutions has approved any advertisement;
or
(g) Contains any untrue
statement or omission of a material fact, or that is otherwise false or
misleading;
(16)
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;
(17) Taking any action, directly or
indirectly, with respect to those securities or funds in which any client has
any beneficial interest, if the investment adviser has custody or possession of
the securities or funds when the adviser's action is subject to and does not
comply with the provisions of
808 KAR 10:020 relating to the
custody;
(18) Entering into,
extending, or renewing an advisory contract unless the contract is in writing
and discloses the following:
(a) The nature of
the advisory services to be provided;
(b) The time period that the contract remains
in effect;
(c) The advisory fee and
the formula for computing the fee;
(d) The amount of the prepaid fee to be
returned if there is contract termination or nonperformance;
(e) Whether the contract grants discretionary
power to the adviser and, if so, the terms of the discretionary
power;
(f) Whether the contract
grants custody of client funds to the adviser and, if so, the terms of the
custody; and
(g) That the adviser
shall not assign the contract without the prior written consent of the
client;
(19) Including in
an advisory contract any condition, stipulation, or provision binding any
client to waive compliance with any provision of the Securities Act of
Kentucky, KRS Chapter 292, 808 KAR Chapter 10, or of the Investment Advisors
Act of 1940, 15 U.S.C.
80b;
(20) Paying compensation, directly or
indirectly, to an investment adviser solicitor unless the investment adviser
makes the payment in accordance with the requirements of
17 C.F.R.
275.206(4)-3) (SEC Rule
206(4)-3);
(21) Engaging in any
act, practice, or course of business which is fraudulent, deceptive, or
manipulative contrary to the provisions of Section 206(4) of the Investment
Advisors Act of 1940, 15
U.S.C. 80b-6(4), whether or
not the investment adviser is registered or required to be registered under
15 U.S.C.
80b-3;
(22) Failing to provide all material
information with respect to any dealings with or recommendations to any
advisory client in violation of
KRS
292.320;
(23) Committing any act involving a client,
the client's assets, or any business records which would constitute a criminal
offense;
(24) Lying to or otherwise
misleading a representative of the Department of Financial Institutions
conducting an authorized examination or investigation;
(25) Failing to make requested records
available to or otherwise impeding a representative of the Department of
Financial Institutions conducting an authorized examination or
investigation;
(26) Failing to
respond in a timely manner to a written request from an authorized
representative of the Department of Financial Institutions for:
(a) Information;
(b) An explanation of practices or
procedures;
(c) A response to a
complaint filed with the department; or
(d) A response to a written statement of
findings from an examination.
(27) Failing to pay and fully satisfy, or
attempting to avoid payment of, any final order, judgment, or arbitration award
resulting from an investment-related, client or customerinitiated arbitration
or court proceeding, unless alternative payment arrangements are agreed to, in
writing, and complied with between:
(a) The
client and the investment adviser or investment adviser representative;
or
(b) Between the customer and the
broker-dealer or the broker-dealer agent; or
(28) Failing to pay and fully satisfy any
fine, civil penalty, order of restitution, order of disgorgement, or similar
monetary payment obligation imposed upon the investment adviser or investment
adviser representative by the Securities and Exchange Commission, the
securities or other financial services regulator of any state or province, or
any selfregulatory organization.
STATUTORY AUTHORITY:
KRS
292.336(7), (8),
292.337,
292.500(3)