Administrative Rules of Montana › Department 6 - STATE AUDITOR › Chapter 6.10 - SECURITIES DEPARTMENT › Subchapter 6.10.4 - Fraudulent and Unethical Practices › Rule 6.10.402 - FRAUDULENT AND UNETHICAL PRACTICES PROHIBITED BY INVESTMENT ADVISERS AND INVESTMENT ADVISER REPRESENTATIVES

Current through Register Vol. 13, July 5, 2024
(1) A person
				who is a federal covered adviser, investment adviser, or an investment adviser
				representative is a fiduciary and has a duty to act for the benefit of its
				clients. The provisions of this rule apply to federal covered advisers to the
				extent that the conduct alleged is fraudulent, deceptive, or as otherwise
				permitted by the National Securities Markets Improvement Act of 1996 (
				PL
				104-290 ). While the extent and nature of this
				duty varies according to the nature of the relationship between an investment
				adviser or a federal covered adviser and its clients and the circumstances of
				each case, an investment adviser or a federal covered adviser shall not engage
				in unethical business practices, including the following:
(a) recommending to a client 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 by
				the investment adviser;
(b)
				exercising any discretionary power in placing an order for the purchase or sale
				of a security for a client without first obtaining written discretionary
				authority from the client within ten 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;
(c) inducing trading in a
				client's account that is excessive in size or frequency in view of the
				financial resources, investment objective, and character of the account if the
				adviser can directly or indirectly benefit from the number of securities
				transactions effected in a client's 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 instructions of a third party without
				first having obtained written third party trading authorization from the
				client;
(f) 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;
(g)
				loaning money to a client unless the investment adviser is a financial
				institution engaged in the business of loaning funds, or the client is an
				affiliate of the investment adviser;
(h) misrepresenting to a client or
				prospective client the qualifications of the investment adviser or an employee
				of the investment adviser; misrepresenting the nature of the advisory services
				being offered or fees to be charged for the investment advisory 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;
(i) providing a report or recommendation to a
				client prepared by someone other than the investment adviser without disclosing
				that fact. This prohibition does not apply to a situation where the investment
				adviser uses a published research report or statistical analysis to render
				advice or where an investment adviser orders such a report in the normal course
				of providing service.
(j) charging
				a client an advisory fee that is unreasonable in light of the type of services
				to be provided, the experience and expertise of the investment adviser, the
				sophistication and bargaining power of the client, and whether the investment
				adviser has disclosed that a lower fee for comparable services may be available
				from other sources;
(k) failing to
				disclose to a client in writing before any advice is rendered a material
				conflict of interest relating to the investment adviser or any of its employees
				which could reasonably be expected to impair the rendering of unbiased and
				objective advice including:
(i) compensation
				arrangements connected with advisory services to a client which are in addition
				to compensation from the client for the services; and
(ii) charging a client an advisory fee for
				rendering advice when a commission for executing securities transactions
				pursuant to the advice will be received by the investment adviser or its
				employees;
(l)
				guaranteeing a client that a specific result will be achieved (gain or no loss)
				with advice which will be rendered;
(m) publishing, circulating or distributing
				sales material which does not comply with rule 206(4)-1 under the Investment
				Adviser Act of 1940;
(n) disclosing
				to a third party the identity, affairs, or investment of a client unless:
(i) required by law to do so; or
(ii) consented to by the client;
(o) taking action, directly or
				indirectly, with respect to those securities or funds in which a client has a
				beneficial interest, if 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 requirements of Rule 206(4)-2 under the Investment
				Advisers Act of 1940, or the investment adviser is exempt from these
				requirements by virtue of Rule 206(4)-2(b);
(p) entering into, extending, or renewing an
				investment advisory contract, other than a contract for impersonal services,
				unless the contract is in writing and discloses, in substance, the services to
				be provided, the term of the contract, the advisory fee, the formula for
				computing the fee, the amount of or the manner of calculation of the prepaid
				fee to be returned in the event of contract termination or nonperformance, and
				whether the contract grants discretionary power to the investment adviser or
				its representative, and that no assignment of such contract shall be made by
				the adviser without the consent of the other party;
(q) failing to disclose to a client or
				prospective client each material fact with respect to:
(i) the financial condition of the investment
				adviser that is reasonably likely to impair the ability of the investment
				adviser to meet contractual commitments to a client, if the investment adviser
				has express or implied discretionary authority or custody over the client's
				funds or securities or requires prepayment of advisory fees of more than $500
				from the client, six months or more in advance; or
(ii) a legal or disciplinary action that is
				material to an evaluation of the investment adviser's integrity or ability to
				meet contractual commitments to a client;
(r) 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 section
				204A of the Investment Advisers Act of 1940;
(s) entering into, extending, or renewing any
				advisory contract contrary to the provisions of section 205 of the Investment
				Advisers Act of 1940. This provision is adopted and incorporated, and applies
				to all advisers registered or required to be registered under the Securities
				Act of Montana, notwithstanding the fact that such investment adviser is not
				registered or required to be registered under section 203 of the Investment
				Advisers Act of 1940. Section 205 establishes standards for investment advisory
				contracts entered into by the adviser and may be obtained from the Commissioner
				of Securities, 840 Helena Avenue, Helena, MT 59601;
(t) to indicate, in an advisory contract, any
				condition, stipulation, or provisions binding any person to waive compliance
				with any provision of this act or of the Investment Advisers Act of 1940, or
				any other practice contrary to the provisions of section 215 of the Investment
				Advisers Act of 1940, which is adopted and incorporated notwithstanding the
				fact that such investment adviser is not registered or required to be
				registered under section 203 of the Investment Advisers Act of 1940. Section
				215 of the Investment Advisers Act of 1940 establishes standards for the
				validity of advisory contracts, and may be obtained from the Commissioner of
				Securities, 840 Helena Avenue, Helena, MT 59601;
(u) engaging in any act, practice, or course
				of business which is fraudulent, deceptive, or manipulative, or contrary to the
				provisions of section 206(4) of the Investment Advisers Act of 1940, which is
				adopted and incorporated, notwithstanding the fact that such investment adviser
				is not registered or required to be registered under section 203 of the
				Investment Advisers Act of 1940. Section 206(4) of the Investment Advisers Act
				of 1940 establishes prohibited practices in the investment advisory business,
				and may be obtained from the Commissioner of Securities, 840 Helena Avenue,
				Helena, MT 59601;
(v) engaging in
				conduct or any act, indirectly through any other person, which would be
				unlawful for such person to do directly under the provisions of the Securities
				Act of Montana or any rule or regulation thereunder; and
(w) engaging in other conduct such as
				nondisclosure, incomplete disclosure, or deceptive practices.