Kan. Admin. Regs. § 81-14-5 - Dishonest and unethical practices of investment advisers, investment adviser representatives, and federal covered investment advisers
(a) Unethical conduct. "Dishonest or
unethical practices," as used in K.S.A. 17-12a412(d)(13) and amendments
thereto, shall include the conduct prohibited in this regulation.
(b) Fraudulent conduct. "An act, practice, or
course of business that operates or would operate as a fraud or deceit," as
used in K.S.A. 17-12a502(a)(2) and amendments thereto, shall include the
conduct prohibited in paragraphs (d)(6), (9), (10), and (11) and subsections
(e), (f), (g), and (h).
(c) General
standard of conduct. Each person registered as an investment adviser or
investment adviser representative under the act shall not fail to observe high
standards of commercial honor and just and equitable principles of trade in the
conduct of the person's business. An investment adviser or investment adviser
representative is a fiduciary and shall act primarily for the benefit of its
clients.
(d) Prohibited conduct:
sales and business practices. Each person registered as an investment adviser
or investment adviser representative under the act shall refrain from the
practices specified in this subsection in the conduct of the person's business.
For purposes of this subsection, a security shall include any security as
defined by K.S.A. 17-12a102, and amendments thereto, including a federal
covered security as defined by K.S.A. 17-12a102, and amendments thereto, or
section 2 of the securities act of 1933, 15 U.S.C. §
77 b, as adopted by
reference in K.A.R. 81-2-1.
(1) Unsuitable
recommendations. An investment adviser or investment adviser representative
shall not recommend to any client to whom investment 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) Improper use of discretionary authority.
An investment adviser or investment adviser representative shall not exercise
any discretionary power in placing an order for the purchase or sale of
securities for any client without obtaining written discretionary authority
from the client within 10 business days after the date of the first transaction
placed pursuant to oral discretionary authority, unless the discretionary power
is limited to the price at which and the time when an order shall be executed
for a definite amount of a specified security.
(3) Excessive trading. An investment adviser
or investment adviser representative shall not induce trading in a client's
account that is excessive in size or frequency in light of the financial
resources, investment objectives, and character of the account.
(4) Unauthorized trading. An investment
adviser or investment adviser representative shall not perform either of the
following:
(A) Place an order to purchase or
sell a security for the account of a client without authority to do so;
or
(B) place 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.
(5)
Borrowing from or loaning to a client. An investment adviser or investment
adviser representative shall not perform either of the following:
(A) Borrow 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;
or
(B) loan 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.
(6)
Misrepresenting qualifications, services, or fees. An investment adviser or
investment adviser representative shall not misrepresent to any advisory client
or prospective client the qualifications of the investment adviser, investment
adviser representative, or any employee of the investment adviser, or
misrepresent the nature of the advisory services being offered or fees to be
charged for the service. An investment adviser or investment adviser
representative shall not omit to state a material fact that is necessary to
make any statements made regarding qualifications, services, or fees, in light
of the circumstance under which the statements are made, not
misleading.
(7) Failure to disclose
source of report. An investment adviser or investment adviser representative
shall not provide a report or recommendation to any advisory client prepared by
someone other than the investment adviser or investment adviser representative
without disclosing that fact. This prohibition shall not apply to a situation
in which the adviser uses published research reports or statistical analyses to
render advice or in which an adviser orders a research report in the normal
course of providing service.
(8)
Unreasonable fee. An investment adviser or investment adviser representative
shall not charge a client an unreasonable advisory fee.
(9) Failure to disclose conflicts of
interest. An investment adviser or investment adviser representative shall not
fail to disclose to a client, in writing and before any advice is rendered, any
material conflict of interest relating to the investment adviser, investment
adviser representative, or any of the investment adviser's employees that could
reasonably be expected to impair the rendering of unbiased and objective
advice, including the following:
(A)
Compensation arrangements connected with advisory services to the client that
are in addition to compensation from the client for the advisory services;
and
(B) charging a client an
advisory fee for rendering advice when a commission for executing securities
transactions pursuant to the advice will be received by the investment adviser,
investment adviser representative, or any of the adviser's employees.
(10) Guaranteeing performance. An
investment adviser or investment adviser representative shall not guarantee a
client that a specific result will be achieved with advice that is
rendered.
(11) Deceptive
advertising. An investment adviser or investment adviser representative shall
not publish, circulate, or distribute any advertisement that does not comply
with SEC rule 206(4)-1, 17 C.F.R. 275.206(4)-1, as adopted by reference in
K.A.R. 81-2-1, despite the fact that the adviser may be exempt from federal
registration pursuant to section 203(b) of the investment advisers act of 1940,
15 U.S.C. § 80b - 3(b) as adopted by reference in K.A.R. 81-2-1.
(12) Failure to protect confidential
information.
(A) An investment adviser or
investment adviser representative shall not disclose the identity, affairs, or
investments of any client unless required by law to do so or unless the client
consents to the disclosure.
(B) An
investment adviser shall not fail to establish, maintain, and enforce written
policies and procedures reasonably designed to prevent the misuse of material
nonpublic information contrary to the provisions of section 204A of the
investment advisers act of 1940, 15 U.S.C. §
80b-4a, as adopted by
reference in K.A.R. 81-21, despite the fact that the adviser may be exempt from
federal registration pursuant to section 203(b) of the investment advisers act
of 1940, 15 U.S.C. § 80b - 3(b), as adopted by reference in K.A.R. 81-2-1.
(13) Improper advisory
contract. An investment adviser shall not engage in the following conduct, even
though the adviser may be exempt from federal registration pursuant to section
203(b) of the investment advisers act of 1940, 15 U.S.C. § 80b - 3(b), as
adopted by reference in K.A.R. 81-2-1:
(A)
Enter into, extend, or renew any investment advisory contract unless the
contract is in writing, discloses 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
nonperformance, and an indication of whether the contract grants discretionary
power to the adviser, and contains a provision that no assignment of the
contract shall be made by the investment adviser without the consent of the
other party to the contract;
(B)
enter into, extend, or renew any advisory contract containing performance-based
fees contrary to the provisions of section 205 of the investment advisers act
of 1940, 15 U.S.C. §
80b-5, as adopted by reference in K.A.R. 81-2-1,
except as permitted by SEC rule 205-3, 17 C.F.R. 275.205-3, as adopted by
reference in K.A.R. 81-2-1; and
(C)
include in an advisory contract any indication of a condition, stipulation, or
provision binding a person to waive compliance with any provision of the act or
of the investment advisers act of 1940, or engage in any other practice
contrary to the provisions of section 215 of the investment advisers act of
1940, 15 U.S.C. §
80b-15, as adopted by reference in K.A.R. 81-2-1.
(14) Indirect
misconduct. An investment adviser or investment adviser representative shall
not engage in any conduct or any act, indirectly or through or by any other
person, that would be unlawful for the person to do directly under the
provisions of the act or these regulations.
(e) Prohibited conduct: failure to disclose
financial condition and disciplinary history.
(1) Definitions. For purposes of this
subsection, the following definitions shall apply:
(A) "Found" means determined or ascertained
by adjudication or consent in a final self-regulatory organization proceeding,
administrative proceeding, or court action.
(B) "Investment-related" means pertaining to
securities, commodities, banking, insurance, or real estate, including acting
as or being associated with a broker, dealer, investment company, investment
adviser, government securities broker or dealer, municipal securities broker or
dealer, bank, savings and loan association, commodities broker or dealer, or
fiduciary.
(C) "Involved" means
acting or aiding, abetting, causing, counseling, commanding, inducing,
conspiring with or failing reasonably to supervise another in doing an
act.
(D) "Management person" means
a person with power to exercise, directly or indirectly, a controlling
influence over the management or policies of an investment adviser that is a
company or to determine the general investment advice given to
clients.
(E) "Self-regulatory
organization" means any national securities or commodities exchange, registered
association, or registered clearing agency.
(2) An investment adviser registered or
required to be registered under the act shall not fail to disclose to any
client or prospective client all material facts with respect to either of the
following:
(A) A failure to meet the positive
net worth requirements of K.A.R. 81-14-9(d); or
(B) any financial condition of the investment
adviser or legal or disciplinary event that is material to an evaluation of the
investment adviser's integrity or ability to meet contractual commitments to
clients.
(3) It shall
constitute a rebuttable presumption that the following legal or disciplinary
events involving the investment adviser or a management person of the
investment adviser are material to an evaluation of the adviser's integrity for
a period of 10 years from the date of the event, unless the legal or
disciplinary event was resolved in the investment adviser's or management
person's favor or was subsequently reversed, suspended, or vacated:
(A) A criminal or civil action in a court of
competent jurisdiction resulting in any of the following:
(i) The individual was convicted of a felony
or misdemeanor, or is the named subject of a pending criminal proceeding, for a
crime involving an investment-related business or fraud, false statements,
omissions, wrongful taking of property, bribery, forgery, counterfeiting,
extortion, or crimes of a similar nature;
(ii) the individual was found to have been
involved in a violation of an investment-related statute or regulation;
or
(iii) the individual 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;
(B) any administrative proceedings before any
federal or state regulatory agency resulting in any of the following:
(i) The individual was found to have caused
an investment-related business to lose its authorization to do business;
or
(ii) the individual 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 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 otherwise
significantly limiting the person's investment-related activities;
and
(C) any
self-regulatory organization proceeding resulting in either of the following:
(i) The individual was found to have caused
an investment-related business to lose its authorization to do business;
or
(ii) the individual was found to
have been involved in a violation of the self-regulatory organization's rules
and was the subject of an order by the self-regulatory organization barring or
suspending the person from association with other members, expelling the person
from membership, fining the person more than $2,500, or otherwise significantly
limiting the person's investment-related activities.
(4) The information required to be
disclosed by paragraph (e)(2) shall be disclosed to clients before further
investment advice is given to the clients. The information shall be disclosed
to prospective clients at least 48 hours before entering into any written or
oral investment advisory contract, or no later than the time of entering into
the contract if the client has the right to terminate the contract without
penalty within five business days after entering into the contract.
(5) For purposes of calculating the 10-year
period during which events shall be presumed to be material under paragraph
(e)(3), 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.
(6) Compliance with this subsection shall not
relieve any investment adviser from any other disclosure requirement under any
federal or state law.
(f) Prohibited conduct: cash payment for
client solicitations. An investment adviser registered or required to be
registered under the act shall not pay a cash fee, directly or indirectly, to a
solicitor with respect to solicitation activities unless the solicitation
arrangement meets all of the requirements of paragraphs (f)(2) through (f)(7).
(1) Definitions. For the purposes of this
subsection, the following definitions shall apply:
(A) "Client" shall include any prospective
client.
(B) "Impersonal advisory
services" means investment advisory services provided solely by means of any of
the following:
(i) Written materials or oral
statements that do not purport to meet the objectives or needs of specific
individuals or accounts;
(ii)
statistical information containing no expression of opinion as to the
investment merits of a particular security; or
(iii) any combination of the materials,
statements, or information specified in paragraphs (f)(1)(B)(i) and
(ii).
(C) "Solicitor"
means any person or entity who, for compensation, directly or indirectly
solicits any client for, or refers any client to, an investment
adviser.
(2) The
investment adviser shall be properly registered under the act.
(3) The solicitor shall not be a person who
meets any of the following conditions:
(A) Is
subject to an order by any regulatory body that censures or places limitations
on the person's activities or that suspends or bars the person from association
with an investment adviser;
(B) was
convicted within the previous 10 years of any felony or misdemeanor involving
the purchase or sale of any security, the taking of a false oath, the making of
a false report, bribery, perjury, burglary, larceny, theft, robbery, extortion,
forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent
conversion, misappropriation of funds or securities, or conspiracy to commit
any such act;
(C) has been found to
have engaged in the willful violation of any provision of these regulations,
the act, the federal securities act of 1933, the federal securities exchange
act of 1934, the federal investment company act of 1940, the federal investment
advisers act of 1940, the federal commodity exchange act, the federal rules
under any of these federal acts, or the rules of the NASD, FINRA, or the
municipal securities rulemaking board; or
(D) is subject to an order, judgment, or
decree by which the person has been convicted anytime during the preceding
10-year period of any crime that is punishable by imprisonment for one or more
years or a substantially equivalent crime by a foreign court of competent
jurisdiction.
(4) The
cash fee shall be paid pursuant to a written agreement to which the investment
adviser is a party.
(5) The cash
fee shall be paid to a solicitor only under any of the following circumstances:
(A) The cash fee is paid to the solicitor
with respect to solicitation activities for the provision of impersonal
advisory services only;
(B) the
cash fee is paid to a solicitor who is a partner, officer, director, or
employee of the investment adviser, or a partner, officer, director, or
employee of a person who controls, is controlled by, or is under common control
with the investment adviser, if the status of the solicitor as a partner,
officer, director, or employee of the investment adviser or other person, and
any affiliation between the investment adviser and the other person, is
disclosed to the client at the time of the solicitation or referral;
or
(C) the cash fee is paid to a
solicitor other than a solicitor specified in paragraph (f)(5)(A) or (B), if
all of the following conditions are met:
(i)
The written agreement required by paragraph (f)(4) describes the solicitation
activities to be engaged in by the solicitor on behalf of the investment
adviser and the compensation to be received, contains an undertaking by the
solicitor to perform the solicitor's duties under the agreement in a manner
consistent with the instructions of the investment adviser and the provisions
of the act and the implementing regulations, and requires the solicitor, at the
time of any solicitation activities for which compensation is paid or to be
paid by the investment adviser, to provide the client with a current copy of
the investment adviser's written disclosure statement required under the
brochure delivery requirements of K.A.R. 81-14-10(b) and a separate written
disclosure document described in paragraph (f)(6).
(ii) The investment adviser receives from the
client, before or when entering into any written or oral investment advisory
contract with the client, a signed and dated acknowledgment of receipt of the
investment adviser's written disclosure statement and the solicitor's written
disclosure document.
(iii) The
investment adviser makes a bona fide effort to ascertain whether the solicitor
has complied with the written agreement required by paragraph (f)(4), and the
investment adviser has a reasonable basis for believing that the solicitor has
complied with the agreement.
(6) The separate written disclosure document
required to be furnished by the solicitor to the client shall contain the
following information:
(A) The name of the
solicitor;
(B) the name of the
investment adviser;
(C) the nature
of the relationship, including any affiliation, between the solicitor and the
investment adviser;
(D) a statement
that the solicitor will be compensated for the solicitation services by the
investment adviser;
(E) the terms
of the compensation arrangement, including a description of the compensation
paid or to be paid to the solicitor; and
(F) the amount in addition to the advisory
fee that the client will be charged for the costs of the solicitor's services,
and any difference in fees paid by clients if the difference is attributable to
the existence of any arrangement in which the investment adviser has agreed to
compensate the solicitor for soliciting clients for, or referring clients to,
the investment adviser.
(7) Nothing in this subsection shall be
deemed to relieve any person of any fiduciary or other obligation to which a
person may be subject under any law.
(g) Prohibited conduct: agency cross
transactions.
(1) For the purposes of this
subsection, "agency cross transaction for an advisory client" shall mean a
transaction in which a person acts as an investment adviser in relation to a
transaction in which the investment adviser, or any person controlling,
controlled by, or under common control with the investment adviser, including
an investment adviser representative, acts as a broker-dealer for both the
advisory client and another person on the other side of the transaction. Each
person acting in this capacity shall be required to be registered as a
broker-dealer in this state unless excluded from the definition of
broker-dealer under K.S.A. 17-12a102, and amendments thereto.
(2) An investment adviser shall not effect an
agency cross transaction for an advisory client unless all of the following
conditions are met:
(A) The advisory client
executes a written consent prospectively authorizing the investment adviser to
effect agency cross transactions for the client.
(B) Before obtaining this written consent
from the client, the investment adviser makes full written disclosure to the
client that, with respect to agency cross transactions, the investment adviser
will act as broker-dealer for both parties to the transaction, receive
commissions from both parties, and have a potentially conflicting division of
loyalties and responsibilities.
(C)
At or before the completion of each agency cross transaction, the investment
adviser sends the client a written confirmation. The written confirmation shall
include all of the following information:
(i)
A statement of the nature of the transaction;
(ii) the date the transaction took
place;
(iii) an offer to furnish,
upon request, the time when the transaction took place; and
(iv) the source and amount of any other
remuneration that the investment adviser received or will receive in connection
with the transaction.
For a purchase in which the investment adviser was not participating in a distribution, or a sale in which the investment adviser was not participating in a tender offer, the written confirmation may state whether the investment adviser has received or will receive any other remuneration and that the investment adviser will furnish the source and amount of remuneration to the client upon the client's written request.
(D) At least annually, the investment adviser
sends each client a written disclosure statement identifying the total number
of agency cross transactions during the period since the date of the last
disclosure statement and the total amount of all commissions or other
remuneration that the investment adviser received or will receive in connection
with agency cross transactions for the client during the period.
(E) Each written disclosure and confirmation
required by this subsection includes a conspicuous statement that the client
may revoke the written consent required under paragraph (g)(2)(A) at any time
by providing written notice to the investment adviser.
(F) No agency cross transaction in which the
same investment adviser recommended the transaction to both any seller and any
purchaser is effected.
(3) Nothing in this subsection shall be
construed to relieve an investment adviser or investment adviser representative
from acting in the best interests of the client, including fulfilling fiduciary
duties with respect to the best price and execution for the particular
transaction for the client, nor shall this subsection relieve any investment
adviser or investment adviser representative of any other disclosure
obligations imposed by the act or the regulations under the act.
(h) Prohibited conduct: use of
senior-specific certifications and professional designations.
(1) An investment adviser or investment
adviser representative shall not use a senior-specific certification or
designation that indicates or implies that the user has special certification
or training in advising or servicing senior citizens or retirees in any way
that misleads any person. This prohibition shall include the following:
(A) The use of a certification or
professional designation by a person who has not earned or is otherwise
ineligible to use that certification or designation;
(B) the use of a nonexistent or
self-conferred certification or professional designation;
(C) the use of a certification or
professional designation that indicates or implies a level of occupational
qualifications obtained through education, training, or experience that the
person using the certification or professional designation does not have;
and
(D) the use of a certification
or professional designation that was obtained from a designating or certifying
organization that meets any of the following conditions:
(i) Is primarily engaged in the business of
instruction in sales or marketing;
(ii) does not have reasonable standards or
procedures for ensuring the competency of its designees or certificate
holders;
(iii) does not have
reasonable standards or procedures for monitoring and disciplining its
designees or certificate holders for improper or unethical conduct;
or
(iv) does not have reasonable
continuing education requirements for its designees or certificate holders to
maintain the professional designation or certification.
(2) There shall be a rebuttable
presumption that a designating or certifying organization is not disqualified
solely for purposes of paragraph (h)(1)(D) if the organization has been
accredited by any of the following:
(A) The
American national standards institute;
(B) the national commission for certifying
agencies; or
(C) an organization
that is on the United States department of education's list titled "accrediting
agencies recognized for title IV purposes," if the designation or credential
does not primarily apply to sales or marketing, or both.
(3) In determining whether a combination of
words or an acronym or initialism standing for a combination of words
constitutes a certification or professional designation indicating or implying
that a person has special certification or training in advising or servicing
senior citizens or retirees, the factors to be considered shall include the
following:
(A) The use of one or more words
including "senior," "retirement," "elder," or similar words, combined with one
or more words including "certified," "registered," "chartered," "adviser,"
"specialist," "consultant," "planner," or similar words, in the name of the
certification or professional designation; and
(B) the manner in which the words are
combined.
(4) For
purposes of this subsection, the terms "certification" and "professional
designation" shall not include a job title within an organization that is
licensed or registered by a state or federal financial services regulatory
agency, including an agency that regulates broker-dealers, investment advisers,
or investment companies, if that job title indicates seniority or standing
within the organization or specifies an individual's area of specialization
within the organization.
(i) Applicability to federal covered
investment advisers. To the extent permitted by federal law, the provisions of
this regulation governing investment advisers shall also apply to federal
covered investment advisers.
Notes
State regulations are updated quarterly; we currently have two versions available. Below is a comparison between our most recent version and the prior quarterly release. More comparison features will be added as we have more versions to compare.
No prior version found.