Mo. Code Regs. tit. 15 § 30-51.172

Current through Register Vol. 49, No. 21, November 1, 2024.

Section 15 CSR 30-51.172 - Dishonest or Unethical Business Practices by Investment Advisers and Investment Adviser Representatives

PURPOSE: This rule identifies dishonest or unethical business practices for investment advisers or investment adviser representatives.

(1) Grounds for the discipline or disqualification of investment advisers or investment adviser representatives (adviser) shall include, in addition to other grounds specified in section 409.4-412(d) of the Missouri Securities Act of 2003 (the Act), the following "dishonest or unethical practices in the securities business":

(A) Recommending to a client to whom investment, supervisory, management, or consulting service are provided that he/she purchase, sell, or exchange any security, commodity, or other investment when the adviser does not have 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 overall portfolio, investment objectives, financial situation and needs, investment experience, and any other information known by the adviser;

(B) Inducing trading in a client's account when:

1. The size or frequency of such trading is excessive given the financial resources, investment objectives, and character of the account; and

2. The adviser directly benefits from the number of securities transactions effected in a client's account;

(C) Ordering the purchase or sale of a security for a client's account without authority to do so;

(D) Ordering the purchase or sale of a security for a client's account upon a third-party's instruction without first receiving the client's third-party trading authorization in writing;

(E) Establishing fictitious accounts in order to execute transactions, which would otherwise be prohibited;

(F) Exercising any discretionary power in ordering the purchase or sale of securities for a client without first obtaining the client's written discretionary authority within ten (10) business days after the date of the first transaction placed pursuant to 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;

(G) 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;

(H) Lending money to a client unless the investment adviser is a financial institution engaged in the business of lending funds or the client is an affiliate of the adviser;

(I) Failing to furnish to a client purchasing securities in an offering, no later than the date of confirmation of the transaction, either a final prospectus or a preliminary prospectus and an additional document, which together include all information set forth in the final prospectus, or making oral or written statements contrary to or inconsistent with the disclosures contained in the prospectus;

(J) Misrepresenting to any client or prospective client the qualifications of the adviser or its employees, or to misrepresent the nature of the advisory services being offered or fees to be charged for such services, 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;

(K) Providing to a client a report or recommendation prepared by someone other than the adviser without also disclosing to the client that someone else prepared that report or recommendation. This prohibition does not apply to an adviser's use of published research reports or statistical analysis when rendering advice, nor when an adviser orders such a report in the normal course of providing service;

(L) Rendering advice to a client before making written disclosure to that client about any material conflict of interest relating to the adviser, its representative, or any of its employees, when that conflict could reasonably be expected to impair the rendering of unbiased and objective advice including:

1. Compensation arrangements connected with advisory services to clients which are in addition to compensation from those clients for such services; and

2. Charging a client an advisory fee for rendering advice when the adviser or its employees will also receive a commission for executing securities transactions pursuant to that advice;

(M) Failing to disclose to any client or prospective client all material facts with respect to:

1. Any financial condition of the adviser that is reasonably likely to impair the ability of the adviser to meet contractual commitments to clients, if the adviser has discretionary authority (express or implied) or custody over such client's funds, assets, or securities, or requires payment of advisory fees six (6) or more months in advance and in excess of five hundred dollars ($500) per client; or

2. Any legal or disciplinary event that is material to an evaluation of the adviser's integrity or ability to meet contractual commitments to clients;

(N) Charging a client an unreasonable and inequitable advisory fee in light of the fees charged by other advisers providing essentially the same services;

(O) Paying solicitor fees if such fees are not paid in accordance with 15 CSR 30-51.145(1), charging performance based fees that are not in accordance with 15 CSR 30-51.145(2), or having custody or possession of a client's funds and/or securities if such custody or possession is not maintained in accordance with 15 CSR 30-51.100. Custody shall include holding checks drawn by the client and made out to a third party for more than one (1) business day;

(P) Guaranteeing a client that a specific result will be achieved (gain or no loss) as a result of advice that will be rendered;

(Q) Disclosing the identity, affairs, or investments of any client to any third party unless required by law to do so, or unless consented to by the client;

(R) Entering into, extending, or renewing any investment advisory contract, other than a contract for impersonal advisory services, unless such contract is in writing and discloses, in substance-

1. The services to be provided;

2. The term of the contract;

3. The advisory fee or the formula for computing the fee;

4. The amount or the manner of calculation of the amount of the prepaid fee to be returned in the event of contract termination or nonperformance;

5. Whether the contract grants discretionary power to the adviser or its representatives;

6. That no assignment of such contract shall be made by the adviser without the client's written consent; and

7. That the investment adviser or investment adviser representative is authorized to record and retain information about the client's designated trusted contact, and to inform the trusted contact person of the designation and disclose information about the client's account in accordance with 15 CSR 30-51.075;

(S) Publishing, circulating, or distributing any advertisement that does not comply with 17 CFR section 275.206(4)-1 ;

(T) Failing or refusing to furnish a customer, upon reasonable request, information to which s/he is entitled, or to respond to a formal written reprimand or complaint;

(U) Engaging in any conduct or act, either directly or indirectly through any other person, which would violate any applicable professional, fair practice or ethical standard established by state or federal law or regulation; and

(V) Aiding or abetting any of the acts or practices enumerated in this rule.

(2) It shall be a dishonest or unethical practice in the securities business for an adviser to use a senior specific certification or designation in connection with the offer, sale, or purchase of securities, or the provision of advice as to the value of or the advisability of investing in, purchasing, or selling securities, either directly or indirectly or through publications or writings, or by issuing or promulgating analyses or reports relating to securities, that indicates or implies that the user has special certification or training in advising or servicing elderly persons, in such a way as to mislead any person.

(A) The prohibited use of such certifications or professional designation includes, but is not limited to, the following:

1. Use of a certification or professional designation by a person who has not actually earned or is otherwise ineligible to use such certification or designation;

2. Use of a nonexistent or self-conferred certification or professional designation;

3. 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

4. Use of a certification or professional designation that was obtained from a designating or certifying organization that is not qualified.

(B) A designating or certifying organization is "qualified" for purposes of paragraph (2)(A)4. above when the organization has been accredited by-

1. The American National Standards Institute;

2. The National Commission for Certifying Agencies; or

3. An organization that is on the United States Department of Education's list entitled "Accrediting Agencies Recognized for Title IV Purposes" and the designation or credential issued therefrom does not primarily apply to sales and/or marketing.

(C) In determining whether a combination of words (or an acronym standing for a combination of words) constitutes a certification or professional designation indicating or implying that an adviser has special certification or training in advising or servicing senior citizens or retirees, factors to be considered shall include:

1. Use of one (1) or more words such as "senior," "retirement," "elder," or like words, combined with one (1) or more words such as "certified," "registered," "chartered," "adviser," "specialist," "consultant," "planner," or like words, in the name of the certification or professional designation; and

2. The manner in which those words are combined.

(D) For purposes of this rule-

1. "Certification or professional designation" does not include a job title within an organization that is licensed or registered by a state or federal financial services regulatory agency, when that job title-

A. Indicates seniority or standing within the organization; or

B. Specifies an individual's area of specialization within the organization;

2. "Elderly person" is a person sixty (60) years of age or older; and

3. "Federal financial services regulatory agency" includes, but is not limited to, any agency that regulates-

A. Broker-dealers;

B. Investment advisers; or

C. Investment companies as defined under the Investment Company Act of 1940.

(E) Nothing in this rule shall limit the commissioner's authority to enforce existing provisions of law.

(F) This rule shall take effect on January 1, 2009.

(3) Failing to disclose to any client or prospective client the following material fact:

(A) If an investment adviser or investment adviser representative incorporates a social objective or other nonfinancial objective into a discretionary investment decision to buy or sell a security or commodity for a client, advice or a recommendation to a client for the purchase or sale of a security or commodity, or the selection, or advice or a recommendation to a client regarding the selection, of a third party manager or subadviser to manage the investments in the client's account, then such investment adviser or investment adviser representative shall disclose to such client the existence of such incorporation;

(B) As used in this section, the following terms mean:

1. "Incorporates a social objective," means the material fact to consider socially responsible criteria in the investment or commitment of client funds for the purpose of seeking to obtain an effect other than the maximization of financial return to the client;

2. "Investment adviser," the same meaning as under section 409.1-102;

3. "Investment adviser representative," the same meaning as under section 409.1-102;

4. "Nonfinancial objective," means the material fact to consider criteria in the investment or commitment of client funds for the purpose of seeking to obtain an effect other than the maximization of financial return to the client;

5.5. "Socially responsible criteria," any criterion that is intended to further, or is branded, advertised, or otherwise publicly described by the investment adviser or investment adviser representative as furthering, any of the following:

A.International, domestic, or industry agreements relating to environmental or social goals;

B.Corporate governance structures based on social characteristics; or

C.Social or environmental goals;

(C) The disclosure obligation under subsection (3)(A) is satisfied by providing clear and conspicuous prior disclosure and obtaining written acknowledgment and consent from the client. Written consent shall be obtained either-

1.At the establishment of the advisory relationship; or

2.Prior to-

A.Effecting the initial discretionary investment for the client's account;

B.Providing the initial recommendation or advice regarding the purchase or sale of a security or commodity in a client's account; or

C.Selecting, or recommending or advising on the selection of, a third-party manager or subadviser to manage the investments in a client's account;

3.Such disclosure, thereafter, shall be provided to the client on an annual basis and, no less than every three (3) years, consented in writing by the client; and

(D) Written consent required in subsection (3)(C) shall contain language that is substantially similar to the following:

"I, [NAME OF CLIENT], consent to my [as applicable, NAME OF INVESTMENT ADVISER OR INVESTMENT ADVISER REPRESENTATIVE] incorporating a social objective or other nonfinancial objective into any discretionary investment decision my [as applicable, INVESTMENT ADVISER OR INVESTMENT ADVISER REPRESENTATIVE] makes for my account; any recommendation or advice my [as applicable, INVESTMENT ADVISER OR INVESTMENT ADVISER REPRESENTATIVE] makes to me for the purchase or sale of a security or commodity; or the selection my [as applicable, INVESTMENT ADVISER OR INVESTMENT ADVISER REPRESENTATIVE] makes, or recommendation or advice my [as applicable, INVESTMENT ADVISER OR INVESTMENT ADVISER REPRESENTATIVE] makes to me regarding the selection of, a third-party manager or subadviser to manage the investments in my account. Also, I acknowledge and understand that incorporating a social objective or other nonfinancial objective into discretionary investment decisions, recommendations, advice, and/or the selection of a third-party manager or subadviser to manage the investments, in regards to my account, will result in investments and recommendations/ advice that are not solely focused on maximizing a financial return for me or my account."

(4) The conduct set forth above is not inclusive. Engaging in other conduct such as nondisclosure or incomplete disclosure of material fact, or other deceptive practices are dishonest or unethical business practices.

15 CSR 30-51.172

AUTHORITY: section 409.6-605, RSMo Supp. 2007.* Original rule filed April 8, 2004, effective Oct. 30, 2004. Amended: Filed March 31, 2008, effective Jan. 1, 2009.

Amended by Missouri Register December 16, 2019/Volume 44, Number 24, effective 1/30/2020

Amended by Missouri Register March 15, 2022/Volume 47, Number 6, effective 4/30/2022

Amended by Missouri Register June 1, 2023/Volume 48, Number 11, effective 7/30/2023

*Original authority: 409.6-605, RSMo 2003.