Section 260.235.4 - Financial and Disciplinary Information Disclosures by Investment Advisers(a) It shall constitute a fraudulent, deceptive, or manipulative act, practice or course of business within the meaning of Section 25235 of the Code for any investment adviser to fail to disclose to any client or prospective client all material facts with respect to:(1) A financial condition of the adviser that is reasonably likely to impair the ability of the adviser to meet contractual commitments to clients if (A) the adviser has discretionary authority (express or implied) or custody over such client's funds or securities, or (B) requires prepayment of advisory fees from such client 6 months or more in advance; or(2) A legal or disciplinary event that is material to an evaluation of the adviser's integrity or ability to meet contractual commitments to clients.(b) It shall constitute a rebuttable presumption that the following legal or disciplinary events involving the adviser or a management person of the adviser (any of the foregoing being referred to hereafter as "person") that were not resolved in the person's favor or subsequently reversed, suspended, or vacated are material within the meaning of subsection (a)(2) of this rule for a period of 10 years from the time of one or more of the following events: (1) A criminal or civil action in a court of competent jurisdiction in which the person: (A) Was convicted, pled guilty or nolo contendere ("no contest") to a felony or misdemeanor, or is the named subject of a pending criminal proceeding (any of the foregoing referred to hereafter as "action"), and such action involved: (i) an investment-related business;(ii) fraud, false statements, or omissions;(iii) wrongful taking of property; or(iv) bribery, forgery, counterfeiting, or extortion;(B) Was found to have been involved in a violation of an investment-related statute or regulation; or(C) 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.(2) Administrative proceedings before the Securities and Exchange Commission, any other federal regulatory agency, or any state agency (any of the foregoing being referred to as "agency") in which the person: (A) Was found to have caused an investment-related business to lose its authorization to do business; or(B) 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 (i) 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 (ii) otherwise significantly limiting the person's investment-related activities.(3) Self-Regulatory Organization ("SRO") proceedings in which the person: (A) Was found to have caused an investment-related business to lose its authorization to do business; or(B) Was found to have been involved in a violation of the SRO's rules and was the subject of an order by the SRO (i) barring or suspending the person from membership or from association with other members, (ii) expelling the person from membership; (iii) fining the person more than $2,500; or (iv) otherwise significantly limiting the person's investment-related activities.(c) The information required to be disclosed by subsection (a) shall be disclosed to existing clients promptly and to prospective clients (A) not less than 48 hours prior to entering into any written or oral investment advisory contract, or (B) no later than the time of entering into such contract if the client has the right to terminate the contract without penalty within five business days after entering into the contract.(d) For purposes of this rule: (1) "Management person" means a person with power to exercise, directly or indirectly, a controlling influence over the management or policies of an investment adviser, which is a company, or to determine the general investment advice given to clients.(2) "Found" means determined or ascertained by adjudication or consent in a final SRO proceeding, administrative proceeding, or court action.(3) "Investment-related" means pertaining to securities, commodities, banking, insurance, or real estate (including, but not limited to, acting as or being associated with a broker-dealer, investment company, investment adviser, government securities broker or dealer, municipal securities dealer, bank, savings and loan association, or other entity or person required to be registered under the Commodity Exchange Act (7 U.S.C. 1 et seq.) or other fiduciary).(4) "Involved" means acting or aiding, abetting, causing, counseling, commanding, inducing, conspiring with or failing reasonably to supervise another in doing an act.(5) "Self-Regulatory Organization" or "SRO" means those terms as defined in 17 CFR 275.206(4)-4(d)(5).(e) For purposes of calculating the 10-year period during which events are presumed to be material under subsection (b), 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.(f) Compliance with subsection (b) of this rule shall not relieve any investment adviser from the disclosure obligations of subsection (a) of this rule. Compliance with subsection (a) of this rule shall not relieve any investment adviser from any other disclosure requirements imposed on investment advisers by the Code or these rules.Cal. Code Regs. Tit. 10, § 260.235.4
1. New section filed 5-12-92; operative 6-11-92 (Register 92, No. 20).
2. Editorial correction of printing errors in section heading and subsection (b)(2)(C) (Register 94, No. 2). Note: Authority cited: Sections 25235(d) and 25610, Corporations Code. Reference: Section 25235(d), Corporations Code.
1. New section filed 5-12-92; operative 6-11-92 (Register 92, No. 20).
2. Editorial correction of printing errors in section heading and subsection (b)(2)(C) (Register 94, No. 2).