Authority: IC 23-19-6-5
Affected: IC 23-19-5-2
Sec. 10.
(a) As used
in this section, "affiliated person" has the meaning set forth in Section
2(a)(3) of the federal Investment Company Act of 1940 (15 U.S.C.
80a-
2(a)(3))
.
(b) As used in this section,
"client's independent agent" means any person who agrees to act as an
investment advisory client's agent in connection with the contract but does not
include any of the following:
(1) The
investment adviser relying on this section.
(2) An affiliated person of the investment
adviser or an affiliated person of an affiliated person of the investment
adviser including an investment adviser representative.
(3) An interested person of the investment
adviser.
(4) A person who receives,
directly or indirectly, any compensation in connection with the contract from:
(A) the investment adviser;
(B) an affiliated person of the investment
adviser;
(C) an affiliated person
of an affiliated person of the investment adviser; or
(D) an interested person of the investment
adviser.
(5) A person
with any material relationship between himself or herself, or an affiliated
person of that person, and the investment adviser, or an affiliated person of
the investment adviser, who exists or has existed at any time during the past
two (2) years.
(c) As
used in this section, "company" means:
(1) a
corporation;
(2) a
partnership;
(3) an
association;
(4) a joint stock
company;
(5) a trust;
(6) any organized group of persons, whether
incorporated or not;
(7) any
receiver;
(8) a trustee in a case
under Title 11 of the United States Code;
(9) a similar official; or
(10) any liquidating agent for any of the
foregoing, in his or her official capacity.
The term does not include a company required to be registered
under the federal Investment Company Act of 1940 but which is not so
registered, a private investment company that is a company that would be
defined as an investment company under Section 3(a) of the federal Investment
Company Act of 1940 (15
U.S.C. 80a-3(a)) but for the
exception from that definition provided by Section 3(c)(1) of that Act
(15 U.S.C.
80a-3(c)(1)) , an
investment company registered under the federal Investment Company Act of 1940,
or a business development company as defined in Section 202(a)(22) of the
federal Investment Adviser Act of 1940 (15 U.S.C. 80b-2(a)(22)) ,
unless each of the equity owners of any business development company, other
than the investment adviser entering into the contract, is a natural person or
company as defined under this subsection.
(d) As used in this section, "interested
person" means any of the following:
(1) Any
member of the immediate family of any natural person who is an affiliated
person of the investment adviser.
(2) Any person who knowingly has any direct
or indirect beneficial interest in or who is designated as trustee, executor,
or guardian of any legal interest in any security issued by the investment
adviser or by a controlling person of the investment adviser if that beneficial
or legal interest exceeds:
(A) one-tenth of
one percent (.1%) of any class of outstanding securities of the investment
adviser or a controlling person of the investment adviser; or
(B) five percent (5%) of the total assets of
the person seeking to act as the client's independent agent.
(3) Any:
(A) person;
(B) partner; or
(C) employee;
of any person who, at any time since the beginning of the
last two (2) years, has acted as legal counsel for the investment
adviser.
(e) Notwithstanding IC 23-19-5-2(c), an
investment adviser may:
(1) enter
into;
(2) extend; or
(3) renew;
an investment advisory 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 of the client if the conditions of
subsections (f) through (k) are met.
(f) The client entering into the contract
must be either of the following:
(1) A natural
person or a company who immediately after entering into the contract has at
least five hundred thousand dollars ($500,000) under the management of the
investment adviser.
(2) A person
who the investment adviser and its investment adviser representatives
reasonably believe, immediately before entering into the contract, is a natural
person or a company whose net worth, at the time the contract is entered into,
exceeds one million dollars ($1,000,000). The net worth of a natural person may
include assets held jointly with that person's spouse.
(g) The compensation paid to the investment
adviser with respect to the performance of any securities over a given period
must be based on a formula with the following characteristics:
(1) In the case of securities for which
market quotations are readily available, within the meaning of Rule 2a-4(a)(1)
under the Investment Company Act of 1940 (17 CFR
270.2a-
4(a)(1)) ,
Definition of "Current Net Asset Value" for Use in Computing Periodically the
Current Price of Redeemable Security), the formula must include the realized
capital losses and unrealized capital depreciation of the securities over the
period.
(2) In the case 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 CFR
270.2a-
4(a)(1)) , the
formula must include the following:
(A) The
realized capital losses of securities over the period.
(B) If the unrealized capital appreciation of
the securities over the period is included, the unrealized capital depreciation
of the securities over the period.
(3) The formula must provide that any
compensation paid to the investment adviser under this rule is based on the
gains less the losses, computed under this subsection, in the client's account
for a period of not less than one (1) year.
(h) Before entering into the advisory
contract and in addition to the requirements of Form ADV, the investment
adviser must disclose in writing to the client or the client's independent
agent all material information concerning the proposed advisory arrangement,
including the following:
(1) 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.
(2) Where relevant, that the investment
adviser may receive increased compensation with regard to unrealized
appreciation as well as realized gains in the client's accounts.
(3) The periods that will be used to measure
investment performance throughout the contract and their potential significance
in the computation of the fee.
(4)
The following concerning indexes:
(A) The
nature of any index that will be used as a comparative measure of investment
performance.
(B) The potential
significance of the index.
(C) The
reasons the investment adviser believes that the index is
appropriate.
(5) 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) of the Investment Company Act
of 1940 (17 CFR
270.2a-
4(a)(1)) , how
the securities will be valued and the extent to which the valuation will be
independently determined.
(i) The investment adviser, and any
investment adviser representative, who enters into the contract must reasonably
believe, immediately before entering into the contract, the following:
(1) The contract represents an arm's length
arrangement between the parties.
(2) The client or, in the case of a client
that is a company as defined in subsection (c), the person representing the
company, alone or together with the client's independent agent, understands the
proposed method of compensation and its risks. The representative of a company
may be:
(A) a partner;
(B) a director;
(C) an officer; or
(D) an employee;
of the company or the trustee, where the company is a trust,
or any other person designated by the company or trustee but must satisfy the
definition of client's independent agent set forth in subsection (b).
(j) Nothing
in this section shall relieve a person entering into or performing an
investment advisory contract from any obligations under IC
23-19-5-2 or any other applicable
provision of IC 23-19.
(k) Nothing
in this section shall relieve a client's independent agent from any obligations
to the client under applicable law.
