Md. Code Regs. 02.02.05.03

Current through Register Vol. 51, No. 24, December 2, 2024

Section 02.02.05.03 - Dishonest or Unethical Practices

A. Definitions. As used in this regulation, the following terms have the meanings indicated:

(1) "Affiliate" has the meaning stated in § 2(a)(3) of the Investment Company Act of 1940.

(2) "Found" means determined or ascertained by adjudication or consent in a final court action, administrative proceeding, or SRO proceeding.

(3) "Investment-related or financially related" means pertaining to investment advisory or financial planning services, counseling or consulting activities, securities, commodities, banking, insurance, real estate, or accountancy, 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, insurance company or agent or broker, bank, savings institution, trust company, credit union, or savings and loan association, or fiduciary, or an entity or person required to be registered under the Commodity Exchange Act.

(4) "Involved" means acting or aiding, abetting, causing, counseling, commanding, inducing, conspiring with, or failing reasonably to supervise another in doing an act.

(5) "Management person" means a person with power to:

(a) Exercise, directly or indirectly, a controlling influence over the management or policies of an investment adviser; or

(b) Determine the general investment advice given to clients.

B. Prohibited Practices. An investment adviser 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 and its clients and the circumstances of each case, an investment adviser may not engage in unethical business practices, including the following:

(1) Recommending to a client to whom investment supervisory, management, or consulting services are provided the purchase, sale, or exchange of a 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 or acquired by the investment adviser after reasonable examination of the client's financial records.

(2) Placing an order to purchase or sell a security for the account of a client without having obtained, in advance, the authority to do so.

(3) 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.

(4) Exercising discretionary power 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 under oral discretionary authority, unless the discretionary power relates solely to the price at which, or the time when, an order involving a definite amount of a specified security shall be executed, or both.

(5) Inducing trading in a client's account that is excessive in size or frequency in view of the financial resources, objectives, and character of the account.

(6) Borrowing 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 securities.

(7) Loaning money to a client unless the investment adviser is a financial institution engaged in the business of loaning funds or a broker-dealer engaged in the management of margin accounts, or unless the client is an affiliate of the investment adviser.

(8) Misrepresenting to an advisory client or prospective advisory client the qualifications of the investment adviser, or an investment adviser representative employed by or associated with the investment adviser or an employee of the investment adviser, or misrepresenting the nature of the advisory services being offered or fees to be charged for that service, or omitting 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.

(9) Providing a report or recommendation to an advisory client prepared by a person other than the investment adviser without disclosing that fact, except that this prohibition does not apply to a situation in which the investment adviser uses published research reports or statistical analyses to render advice or a situation in which an adviser orders these reports in the normal course of providing services.

(10) Charging a client an unreasonable advisory fee in light of the fees charged by other investment advisers providing essentially the same services.

(11) Failing to disclose to clients in writing before advice is rendered a material conflict of interest relating to the investment adviser or any of its affiliates or employees that could reasonably be expected to impair the rendering of unbiased and objective advice, including conflicts that may arise from:

(a) Compensation arrangements connected with advisory services to clients that are in addition to compensation from the clients for these 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:

(i) The investment adviser;

(ii) Any affiliate of the investment adviser;

(iii) Any investment adviser representative employed by or associated with the investment adviser; or

(iv) Any employee of the investment adviser.

(12) Guaranteeing a client that a certain or specific result will be achieved, for example, gain or no loss, as a result of the advice that will be rendered.

(13) Publishing, circulating, or distributing an advertisement that does not comply with 17 CFR § 275.206(4) -1 (SEC Rule 206(4)-1, Advertisements by Investment Advisers).

(14) Disclosing the identity, affairs, or investments of a client to a third party without the consent of the client, unless required by law to do so.

(15) Taking an action, directly or indirectly, with respect to those securities, instruments, or funds in which a client has a beneficial interest, when the investment adviser has custody or possession of the securities or funds when the investment adviser's action is subject to and does not comply with the safekeeping requirements of 17 CFR § 275.206(4) -2 (SEC Rule 206(4)-2, Custody or Possession of Funds or Securities of Clients).

(16) Entering into, extending, or renewing an investment advisory contract unless the contract is in writing and discloses, in substance:

(a) The services to be provided;

(b) The term of the contract;

(c) The advisory fee or the formula for computing the fee;

(d) The amount of prepaid fee to be returned in the event of contract termination or nonperformance;

(e) Whether the contract grants discretionary power to the investment adviser; and

(f) That an assignment of the contract may not be made by the investment adviser without the consent of the other party to the contract.

C. Failure to Disclose.

(1) It shall constitute a dishonest and unethical business practice within the meaning of the Maryland Securities Act, Corporations and Associations Article, § 11-302(a)(3), Annotated Code of Maryland, for an investment adviser to fail to disclose to a client or prospective client all material facts with respect to:

(a) A financial condition of the adviser that is reasonably likely to impair the ability of the investment adviser to meet contractual commitments to the client, if the investment adviser has discretionary authority, whether express or implied, or custody over the client's funds, instruments, or securities, or requires prepayment of advisory fees of more than $500 from the client at a time more than 6 months in advance of performance; or

(b) A legal or disciplinary event that is material to an evaluation of the investment adviser's integrity or ability to meet contractual commitments to clients.

(2) Investment advisers may disclose the information required by this section in their "brochure", the Form ADV-Part II written disclosure statement that is required to be made to clients under the Maryland Securities Act, Corporations and Associations Article, §§ 11-302(d) and 11-411(b), Annotated Code of Maryland, and Regulation .05 of this chapter, if the delivery of the brochure satisfies the timing of disclosure requirements described in §D of this regulation.

D. Timing of Disclosure. The information required to be disclosed by §C of this regulation shall be disclosed to clients promptly, and to prospective clients not less than 48 hours before entering into a written or oral investment advisory contract, or not later than the time of entering into a contract if the client has the right to terminate the contract without penalty within 5 business days after entering into the contract.

E. Material Events. There shall be a rebuttable presumption that the following legal or disciplinary events involving the investment adviser or a management person of the adviser (any of these being referred to after this as "person") that were not resolved in the person's favor or subsequently reversed, suspended, or vacated, are material within the meaning of §C(1)(b) of this regulation for a period of 10 years from the time of the event:

(1) A criminal or civil action in a court of competent jurisdiction in which the person was:

(a) Convicted of, or pleaded guilty or nolo contendere to, a felony or misdemeanor, or is the named subject of a pending criminal proceeding or indictment (any of these referred to after this as "action"), and the action involved an investment-related or financially related business, fraud, false statements or omissions, wrongful taking of property, bribery, forgery, counterfeiting, or extortion;

(b) Found to have been involved in a violation of an investment-related or financially related statute or regulation; or

(c) The subject of an order, judgment, or decree permanently or temporarily enjoining or otherwise limiting the person from engaging in an investment-related or financially related activity.

(2) Administrative proceedings before the Commissioner, the SEC, other federal regulatory agency, or other state ("agency") in which the person was found to have:

(a) Caused an investment-related or financially related business or entity to lose its license or authorization to do business; or

(b) Been involved in a violation of an investment-related or financially related statute or regulation and was the subject of an order by the agency denying, suspending, or revoking the license or authorization of the person to act in, or barring or suspending the person's association with, an investment-related or financially related business, entity, or individual, or otherwise limiting significantly the person's investment-related or financially related activities.

(3) Self-regulatory organization proceedings in which the person was found to have:

(a) Caused an investment-related or financially related business or entity to lose its license or authorization to do business; or

(b) Been involved in a violation of the SRO's rules and was the subject of an order by the SRO barring or suspending the person from membership or from association with other members, or expelling the person from membership, fining the person more than $2,500, or otherwise significantly limiting the person's investment-related or financially related activities.

F. Calculating Time Period. For purposes of calculating the 10-year period during which events are presumed to be material under §E of this regulation, the date of a reportable event shall be the date on which the final order, judgment, or decree was entered, or the latest date on which a right of appeal from a preliminary order, judgment, or decree lapsed.

G. Other Conduct and Obligations. The conduct set forth in §§B-F of this regulation is not inclusive. Engaging in other conduct such as nondisclosure, incomplete disclosure, or deceptive practices shall be considered an unethical business practice. Compliance with this regulation does not relieve an investment adviser from any obligations under any other disclosure requirement of the Maryland Securities Act, Corporations and Associations Article, Title 11, Annotated Code of Maryland, or a regulation or order promulgated under it, or any other state or federal law, rule, or regulation.

Md. Code Regs. 02.02.05.03

Regulations .03 adopted as an emergency provision effective July 25, 1989 (16:16 Md. R. 1733); emergency status expired December 22, 1989
Regulations .03 adopted as an emergency provision effective December 23, 1989 (17:1 Md. R. 63); adopted permanently effective April 16, 1990 (17:7 Md. R. 845)