Mich. Admin. Code R. 451.4.25 - Prohibited practices of investment advisers and investment adviser representatives

Rule 4.25

(1) For purposes of subrule (2)(l) of this rule, the following definitions apply:

(a) "Publicly distributed written materials" means written materials that are distributed to 35 or more persons who pay for those materials.

(b) "Publicly made oral statements" means oral statements made simultaneously to 35 or more persons who pay for access to those statements.

(2) A person who is an investment adviser or an investment adviser representative is a fiduciary and has a duty to act primarily for the benefit of its clients. While the extent and nature of this duty varies according to the nature of the relationship between an investment adviser or an investment adviser representative and its clients and the circumstances of each case, an investment adviser or an investment adviser representative shall not engage in fraudulent, deceptive, or manipulative conduct, including but not limited to, the following:

(a) Recommending to a client to whom investment adviser 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 clients investment objectives, financial situation and needs, and any other information known by the investment adviser or investment adviser representative.

(b) Exercising any discretionary authority in placing an order for the purchase or sale of securities for a 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 authority relates solely to the price at which, or the time when, an order involving a definite amount of a specified security must be executed, or both.

(c) Inducing trading in a clients account that is excessive in size or frequency in view of the financial resources, investment objectives, and character of the account.

(d) Placing an order to purchase or sell a security for the account of a client without authority to do so.

(e) 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.

(f) Borrowing money or securities from a client unless 1 of the following is true:

(i) The client is a broker-dealer, an affiliate of the investment adviser, or a financial institution engaged in the business of loaning funds.

(ii) The client is the investment advisers or investment adviser representatives parent, parent-in-law, spouse, child, child-in-law, grandparent, grandchild, aunt, uncle, niece, nephew, or cousin, including any step-family or adoptive relationship and all of the following are true:

(A) The borrowing arrangement is permitted by the investment advisers written policies and procedures.

(B) The investment adviser or investment adviser representative has written permission from the investment adviser to enter the borrowing arrangement.

(C) The borrowing arrangement is evidenced by a written document maintained by the investment adviser until the borrowing arrangement is fully repaid to the lender.

(g) Loaning money or securities to a client unless 1 of the following is true:

(i) The investment adviser is a broker-dealer, bank, or other financial institution engaged in the business of loaning funds or the client is an affiliate of the investment adviser.

(ii) The client is the investment advisers or investment adviser representatives parent, parent-in-law, spouse, child, child-in-law, grandparent, grandchild, aunt, uncle, niece, nephew, or cousin, including any step-family or adoptive relationship and all of the following are true:

(A) The lending arrangement is permitted by the investment advisers written policies and procedures.

(B) The investment adviser or investment adviser representative has written permission from the investment adviser to enter the lending arrangement.

(C) The lending arrangement is evidenced by a written document maintained by the investment adviser until the lending arrangement is fully repaid by the borrower.

(h) Misrepresenting to any client, or prospective client, the qualifications of the investment adviser, investment adviser representative, or any employee, or person affiliated with the investment adviser or investment adviser representative, or misrepresenting the nature of the advisory services being offered or fees to be charged for such service, or to omit to state a material fact necessary to make the statements made regarding qualifications, services or fees, in light of the circumstances under which they are made, not misleading.

(i) Providing a report or recommendation to any client prepared by someone other than the investment adviser or investment adviser representative without disclosing the identity of the person who prepared the report or recommendation. This prohibition does not apply to a situation where the investment adviser or investment adviser representative uses published research reports or statistical analyses to render advice or where an investment adviser or investment adviser representative orders such a report in the normal course of providing service.

(j) Charging a client an unreasonable advisory fee.

(k) Failing to disclose to clients in writing before any advice is rendered any material conflict of interest relating to the investment adviser or investment adviser representative, or any of its employees, or affiliated persons that could reasonably be expected to impair the rendering of unbiased and objective advice, including but not limited to, the following:

(i) Compensation arrangements connected with investment adviser services to clients that are in addition to compensation from such clients for such services.

(ii) Charging a client an investment adviser fee for rendering investment advice when compensation for effecting securities transactions pursuant to such advice is received by the investment adviser or investment adviser representative or its employees, or affiliated persons.

(l) While acting as principal for an advisory account of the investment adviser or investment adviser representative, to knowingly sell any security to or purchase any security from a client, or while acting as broker-dealer for a person other than the client, to knowingly effect any sale or purchase of any security for the account of the client, without disclosing to the client in writing before the completion of the transaction the capacity in which the investment adviser or investment adviser representative is acting and obtaining the consent of the client to the transaction. The prohibitions of this subdivision do not apply to either of the following:

(i) A transaction with a customer of a broker-dealer if the broker-dealer is not acting as an investment adviser in relation to the transaction.

(ii) A transaction with a customer of a broker-dealer if the broker-dealer acts as an investment adviser solely by any of the following methods:

(A) By means of publicly distributed written materials or publicly made oral statements.

(B) By means of written materials or oral statements not purporting to meet the objectives or needs of specific individuals or accounts.

(C) Through the issuance of statistical information containing no expressions of opinion as to the investment merits of a particular security.

(D) Any combination of the services in this subparagraph.

(m) Guaranteeing a client that a specific result shall be achieved with advice rendered.

(n) Publishing, circulating, or distributing any advertisement that directly or indirectly does not comply with rule 206(4)-1 under the investment advisers act of 1940.

(o) Making, in the solicitation of clients, any untrue statement of a material fact, or omitting to state a material fact necessary in order to make the statement made, in light of the circumstances under which they are made, not misleading.

(p) Failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information contrary to the provisions of sections 204A of the investment advisers act of 1940, 17 C.F.R. § 275.204A-1.

(q) Taking any action, directly or indirectly, with respect to those securities or funds in which any client has any beneficial interest, where the investment adviser has custody or possession of such securities or funds when the action of the investment adviser or investment adviser representative is subject to and does not comply with the requirements of R 451.4.13.

(r) Engaging in conduct or any act, indirectly or through or by any other person, which would be unlawful for such person to do directly under the provisions of the act or any rule or regulation thereunder.

(3) Publicly distributed written materials or publicly made oral statements must disclose that, if the purchaser of the advisory communication uses the investment advisers services in connection with the sale or purchase of a security which is a subject of the communication, the investment adviser may act as a principal for its own account or as agent for another person. Compliance by the investment adviser with the foregoing disclosure requirement does not relieve it of any other disclosure obligations under the act.

(4) The prohibition on agency cross transactions does not apply if 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 such client.

(b) Before obtaining such 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 a broker-dealer for, receive commissions from, and have a potentially conflicting division of loyalties and responsibilities regarding both parties to the transactions.

(c) At or before the completion of each agency cross transaction, the investment adviser or any other person relying on this rule sends the client a written confirmation. The written confirmation must include all of the following:

(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.

(iv) The source and amount of any other remuneration the investment adviser received or shall receive in connection with the transaction. In the case of a purchase, if the investment adviser was not participating in a distribution, or, in the case of a sale, if the investment adviser was not participating in a tender offer, the written confirmation may state whether the investment adviser has received or shall receive any other remuneration and that the investment adviser shall furnish the source and amount of such remuneration to the client upon the clients written request.

(5) At least annually, with or as part of any written statement or summary of the account from the investment adviser, the investment adviser or any other person relying on this rule to conduct agency cross transactions shall send each client a written disclosure statement identifying both of the following:

(a) The total number of agency cross-transactions during the period for the client since the date of the last such statement or summary.

(b) The total amount of all commissions or other remuneration the investment adviser received or shall receive in connection with agency cross transactions for the client during the period.

(6) Each written disclosure and confirmation must include a conspicuous statement that the client may revoke the written consent required by this rule at any time by providing written notice to the investment adviser.

(7) No agency cross transaction may be effected in which the same investment adviser recommended the transaction to both any seller and any purchaser.

(8) Nothing in this rule shall be construed to relieve an investment adviser or investment adviser representative from acting in the best interests of the client, including fulfilling a duty with respect to the best price and execution for the particular transaction for the client, nor does it relieve any investment adviser or investment adviser representative of any other disclosure obligations imposed by the act or rules.

(9) For the purposes of this rule, the term investment adviser representative must exclude a supervised person of a federal covered investment adviser as that term is defined in section 202(a)(25) of the investment advisers act of 1940, 17 C.F.R. § 275.203A-3.

Notes

Mich. Admin. Code R. 451.4.25

2019 MR 1, Eff. 7/3/2019