R. 451.4.26 - Investment adviser contracts

R. 451.4.26. Investment adviser contracts

Rule 4.26.

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

(a) "Assignment," as used in subrule (3)(b) of this rule, includes, but is not limited to, a transaction or event that results in a 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% of any class of voting securities of, the 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.

(b) "Private investment company" means a company that is defined as an investment company under section 3(a) of the investment company act of 1940, 15 U.S.C. § 80a-3(a), but for the exception provided from that definition by section 3(c)(1) of the investment company act of 1940, 15 U.S.C. § 80A-3.

(2) This rule applies 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 act of 1996, 15 U.S.C. § 78a et seq.

(3) It is unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract unless it provides in writing all of the following:

(a) The services to be provided; the term of the contract if the contract has a specific term, otherwise it should describe how the contract may be terminated by either party; the investment advisory fee; the formula for computing the fee; the amount of prepaid fee to be returned in the event of termination or non-performance of the contract; and, any grant of discretionary power to the investment adviser or any of its investment adviser representatives.

(b) That no direct or indirect assignment or transfer of the contract may be made by the investment adviser without the consent of the client or other party to the contract. Unless prohibited by contract, a clients consent may be implied with at least 30 days prior written notice of an anticipated change of control, followed by written notice of the consummation of the change of control, provided that the client is both notified and permitted to discontinue services and terminate the contract within 30 days without cost or penalty.

(c) That the 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, if a partnership or limited liability company, 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.

(4) It is unlawful for any investment adviser, investment adviser representative, or federal covered investment adviser to do any of the following:

(a) Include in an advisory contract, any condition, stipulation, or provisions binding any person to waive compliance with any provision of this act or the investment advisers act of 1940, 15 U.S.C. § 80b-1 et seq., or any other practice contrary to the provisions of section 215 of the investment advisers act of 1940, 15 U.S.C. § 80b-15.

(b) Enter into, extend, or renew any advisory contract contrary to the provisions of section 205 of the investment advisers act of 1940, 15 U.S.C. § 80b-5. This provision applies to all advisers and investment adviser representatives registered or required to be registered under the 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, 15 U.S.C. § 80b-3.

(5) Notwithstanding subrules (3)(c) and (4)(b) of this rule, an investment adviser may enter into, extend, or 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, or any portion of the funds, of the client if either of the following occur:

(a) The investment adviser is not registered and is not required to be registered pursuant to section 403 of the act, MCL 451.2403; or

(b) All of the following conditions are met:

(i) The client entering into the contract is a "qualified client", as defined by rule 205-3 under the investment advisers act of 1940, 17 C.F.R § 275.205-3.

(ii) To the extent not otherwise disclosed on part 2 of Form ADV, the investment adviser shall disclose in writing to the client all material information concerning the proposed advisory arrangement, including all of the following:

(A) 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.

(B) Where relevant, that the investment adviser may receive increased compensation with regard to unrealized appreciation as well as realized gains in the clients account.

(C) The periods that will be used to measure investment performance throughout the contract and their significance in the computation of the fee.

(D) The nature of any index that 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.

(E) Where the investment advisers 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) under the investment company act of 1940, 17 C.F.R. § 270.2a-4(a)(1), how the securities will be valued and the extent to which the valuation will be independently determined.

(6) In the case of a private investment company, an investment company registered under the investment company act of 1940, 15 U.S.C. §§ 80a-1, et seq. or a business development company, as defined in section 202(a)(22) of the investment advisers act of 1940, 15 U.S.C. § 80b-2(a)(22), each equity owner of any such company, except for the investment adviser entering into the contract and any other equity owners not charged a fee on the basis of a share of capital gains or capital appreciation, shall be considered a client for purposes of subrules (3)(c) and (5) of this rule.

(2019 MR 1, Eff. July 3, 2019)

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