Iowa Admin. Code r. 191-50.46 - Contents of investment advisory contract
The provisions of this rule shall apply to federal covered
investment advisers to the extent that the conduct alleged is fraudulent,
deceptive, or as otherwise permitted by the National Securities Markets
Improvement
(1) It is
unlawful for any investment adviser, investment adviser representative, or
federal covered investment adviser to enter into, extend, or renew any
investment advisory contract unless it provides in writing:
a. The services to be provided, the term of
the contract, the investment advisory fee, the formula for computing the fee,
the amount of prepaid fee to be returned in the event of termination or
nonperformance of the contract, and any grant of discretionary power to the
investment adviser, investment adviser representative, or federal covered
investment adviser;
b. That no
direct or indirect assignment or transfer of the contract may be made by the
investment adviser, investment adviser representative, or federal covered
investment adviser without the consent of the client or other party to the
contract;
c. That the investment
adviser, investment adviser representative, or federal covered investment
adviser shall not be compensated 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;
d. That the investment
adviser, investment adviser representative, or federal covered investment
adviser, if a partnership, shall notify the client or other party to the
investment contract of any change in the membership of the partnership within a
reasonable time after the change.
(2) It is unlawful for any investment
adviser, investment adviser representative, or federal covered investment
adviser to:
a. Include in an advisory contract
any condition, stipulation, or provisions binding any person to waive
compliance with any provision of this Act or of the Investment Advisers Act of
1940, or any other practice contrary to the provisions of Section 215 of the
Investment Advisers Act of 1940; or
b. Enter into, extend or renew any advisory
contract contrary to the provisions of Section 205 of the Investment Advisers
Act of 1940. This provision shall apply to all advisers and investment adviser
representatives registered or required to be registered under this Act ,
notwithstanding whether such adviser or representative would be exempt from
federal registration pursuant to Section 203(b) of the Investment Advisers Act
of 1940.
(3)
Notwithstanding paragraph 50.46(1)"c, " an investment adviser
may enter into, extend or renew an investment advisory contract which 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 if the conditions in paragraphs 50.46(3)"a"
to"d" are met.
a. The client
entering into the contract must be:
(1) A
natural person or a company that, immediately after entering into the contract,
has at least $750,000 under the management of the investment adviser;
or
(2) A person that 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 $1,500,000.
The net worth of a natural person may include assets held jointly with that
person's spouse.
b. 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)(l) under the Investment Company Act of 1940(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)(l) under the Investment Company Act of 1940, the
formula must include:
1. The realized capital
losses of securities over the period; and
2. If the unrealized capital appreciation of
the securities over the period is included, the unrealized capital depreciation
of the securities over the period; and
(3) The formula must provide that any
compensation paid to the investment adviser under paragraph 50.46(3)"b
" is based on the gains less the losses(computed in accordance with
subparagraphs 50.46(3)"b "(1) and(2)) in the client's account
for a period of not less than one year.
c. 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 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
account;
(3) The periods which will
be used to measure investment performance throughout the contract and their
significance in the computation of the fee;
(4) The nature of any index which will be
used as a comparative measure of investment performance, the significance of
the index, and the reason the investment adviser believes that the index is
appropriate; and
(5) When 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)(l) under the Investment Company
Act of 1940, how the securities will be valued and the extent to which the
valuation will be independently determined.
d. The investment adviser(and any investment
adviser representative) that enters into the contract must reasonably believe,
immediately before entering into the contract, that the contract represents an
arm's length arrangement between the parties and that the client(or in the case
of a client which is a company as defined in paragraph 50.46(6)"d,
" 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 partner, director, officer
or an employee of the company or of 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 paragraph
50.46(6)"c. "
(4) Any person entering into or performing an
investment advisory contract under rule
191-5046.
(502) is not relieved of any obligations under rule
191-5038.
(502) or any other applicable provision of the Act or any rule or order
thereunder.
(5) Nothing in rule
191-5046.
(502) shall relieve a client's independent agent from any obligation to the
client under applicable law.
(6)
The following definitions apply for purposes of rule
191-5046.
(502):
a.
"Affiliate" shall
have the same definition as in Section 2(a)(3) of the Investment Company Act of
1940.
b.
"Assignment," as used in paragraph
50.46(1)"b," includes, but is not limited to, any transaction
or event that results in any change to the individuals or entities with the
power, directly or indirectly, to direct the management or policies of, or to
vote more than 50 percent of any class of voting securities of, the investment
adviser or federal covered investment adviser as compared to the individuals or
entities that had such power as of the date when the contract was first entered
into, extended or renewed.
c.
"Client's independent agent" means any person who agrees to
act as an investment advisory client's agent in connection with the contract.
"Client's independent agent" does not include:
(1) The investment adviser relying on rule
191-5046.
(502);
(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
the investment adviser, an affiliated person of the investment adviser, an
affiliated person of an affiliated person of the investment adviser or an
interested person of the investment adviser; or
(5) A person with any material relationship
between the person (or an affiliated person of that person) and the investment
adviser(or an affiliated person of the investment adviser) that exists, or has
existed at any time during the past two years.
d.
"Company" means a
corporation, partnership, association, joint stock company, trust, or any
organized group of persons, whether incorporated or not; or any receiver,
trustee in a case under Title 11 of the United States Code, or similar official
or any liquidating agent for any of the foregoing, in the liquidating agent's
capacity as such. "Company" shall not include:
(1) A company required to be registered under
the Investment Company Act of 1940 but which is not so registered;
(2) A private investment company is an entity
which would be defined as an investment company under Section 3(a) of the
Investment Company Act of 1940 but for the exception from that definition
provided by Section 3(c)(1) of that Act ;
(3) An investment company registered under
the Investment Company Act of 1940; or
(4) A business development company as defined
in Section 202(a)(22) of the Investment Advisers Act of 1940, unless each of
the equity owners of any such company, other than the investment adviser
entering into the contract, is a natural person or a company within the meaning
of "company."
e.
"Interestedperson" means:
(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:
1. One-tenth of one
percent of any class of outstanding securities of the investment adviser or a
controlling person of the investment adviser; or
2. Five percent of the total assets of the
person seeking to act as the client's independent agent; or
(3) Any person or partner or
employee of any person who has acted as legal counsel for the investment
adviser within the past two years.
Notes
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