Virginia Administrative Code › Title 21 - SECURITIES AND RETAIL FRANCHISING › Agency 5 - STATE CORPORATION COMMISSION › Chapter 80 - INVESTMENT ADVISORS › Part III - Investment Advisor, Federal Covered Advisor, and Investment Advisor Representative Regulations › Section 21VAC5-80-200 - Dishonest or unethical practices

Current through Register Vol. 40, No. 24, July 15, 2024
A. An investment advisor or federal covered
				  advisor is a fiduciary and has a duty to act primarily for the benefit of his
				  clients. While the extent and nature of this duty varies according to the
				  nature of the relationship between an investment advisor or federal covered
				  advisor and his clients and the circumstances of each case, an investment
				  advisor or federal covered advisor who is registered or required to be
				  registered shall not engage in unethical 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 any 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, risk tolerance and needs,
				  and any other information known or acquired by the investment advisor or
				  federal covered advisor 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 written
				  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 authorization from the client.
4. Exercising any 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 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.
5. Inducing trading in a client's account
				  that is excessive in size or frequency in view of the financial resources,
				  investment 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
				  advisor or federal covered advisor, or a financial institution engaged in the
				  business of loaning funds or securities.
7. Loaning money to a client unless the
				  investment advisor or federal covered advisor is a financial institution
				  engaged in the business of loaning funds or the client is an affiliate of the
				  investment advisor or federal covered advisor.
8. Misrepresenting to any advisory client, or
				  prospective advisory client, the qualifications of the investment advisor or
				  federal covered advisor, or misrepresenting the nature of the advisory services
				  being offered or fees to be charged for the services, or omission 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 any advisory client prepared by someone other than the
				  investment advisor or federal covered advisor without disclosing that fact.
				  This prohibition does not apply to a situation where the advisor uses published
				  research reports or statistical analyses to render advice or where an advisor
				  orders such a report in the normal course of providing service.
10. Charging a client an unreasonable
				  advisory fee in light of the fees charged by other investment advisors or
				  federal covered advisors providing essentially the same services.
11. Failing to disclose to clients in writing
				  before any advice is rendered any material conflict of interest relating to the
				  investment advisor or federal covered advisor or any of his employees which
				  could reasonably be expected to impair the rendering of unbiased and objective
				  advice including:
a. Compensation arrangements
				  connected with advisory services to clients which are in addition to
				  compensation from such clients for such services; or
b. Charging a client an advisory fee for
				  rendering advice when a commission for executing securities transactions
				  pursuant to such advice will be received by the advisor or his
				  employees.
12.
				  Guaranteeing a client that a specific result will be achieved as a result of
				  the advice which will be rendered.
13. Directly or indirectly using any
				  advertisement that does any one of the following:
a. Refers to any testimonial of any kind
				  concerning the investment advisor or investment advisor representative or
				  concerning any advice, analysis, report, or other service rendered by the
				  investment advisor or investment advisor representative;
b. Refers to past specific recommendations of
				  the investment advisor or investment advisor representative that were or would
				  have been profitable to any person; except that an investment advisor or
				  investment advisor representative may furnish or offer to furnish a list of all
				  recommendations made by the investment advisor or investment advisor
				  representative within the immediately preceding period of not less than one
				  year if the advertisement or list also includes both of the following:
(1) The name of each security recommended,
				  the date and nature of each recommendation, the market price at that time, the
				  price at which the recommendation was to be acted upon, and the most recently
				  available market price of each security; and
(2) A legend on the first page in prominent
				  print or type that states that the reader should not assume that
				  recommendations made in the future will be profitable or will equal the
				  performance of the securities in the list;
c. Represents that any graph, chart, formula,
				  or other device being offered can be used to determine which securities to buy
				  or sell, or when to buy or sell them; or which represents, directly or
				  indirectly, that any graph, chart, formula, or other device being offered will
				  assist any person in making that person's own decisions as to which securities
				  to buy or sell, or when to buy or sell them, without prominently disclosing in
				  the advertisement the limitations thereof and the risks associated to its
				  use;
d. Represents that any report,
				  analysis, or other service will be furnished for free or without charge, unless
				  the report, analysis, or other service actually is or will be furnished
				  entirely free and without any direct or indirect condition or
				  obligation;
e. Represents that the
				  commission has approved any advertisement; or
f. Contains any untrue statement of a
				  material fact, or that is otherwise false or misleading.
For the purposes of this section, the term "advertisement"
					 includes any notice, circular, letter, or other written communication addressed
					 to more than one person, or any notice or other announcement in any electronic
					 or paper publication, by radio or television, or by any medium, that offers any
					 one of the following:
(i) Any
				  analysis, report, or publication concerning securities;
(ii) Any analysis, report, or publication
				  that is to be used in making any determination as to when to buy or sell any
				  security or which security to buy or sell;
(iii) Any graph, chart, formula, or other
				  device to be used in making any determination as to when to buy or sell any
				  security, or which security to buy or sell; or
(iv) Any other investment advisory service
				  with regard to securities.
14. Disclosing the identity, affairs, or
				  investments of any client to any third party unless required by law or an order
				  of a court or a regulatory agency to do so, or unless consented to by the
				  client.
15. Taking any action,
				  directly or indirectly, with respect to those securities or funds in which any
				  client has any beneficial interest, where the investment advisor has custody or
				  possession of such securities or funds, when the investment advisor's action is
				  subject to and does not comply with the safekeeping requirements of
				  21VAC5-80-146.
16. Entering into, extending or renewing any
				  investment advisory contract 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 prepaid fee to
				  be returned in the event of contract termination or nonperformance, whether the
				  contract grants discretionary power to the investment advisor or federal
				  covered advisor and that no assignment of such contract shall be made by the
				  investment advisor or federal covered advisor without the consent of the other
				  party to the contract.
17. Failing
				  to clearly and separately disclose to its customer, prior to any security
				  transaction, providing investment advice for compensation or any materially
				  related transaction that the customer's funds or securities will be in the
				  custody of an investment advisor or contracted custodian in a manner that does
				  not provide Securities Investor Protection Corporation protection, or
				  equivalent third-party coverage over the customer's assets.
18. Using a certification or professional
				  designation in connection with 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 senior citizens or retirees in such a way as to mislead any person.
a. The use of such certification or
				  professional designation includes the following:
(1) Use of a certification or 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; or
(4) Use of a certification
				  or professional designation that was obtained from a designating or certifying
				  organization that:
(a) Is primarily engaged in
				  the business of instruction in sales or marketing;
(b) Does not have reasonable standards or
				  procedures for assuring the competency of its designees or
				  certificants;
(c) Does not have
				  reasonable standards or procedures for monitoring and disciplining its
				  designees or certificants for improper or unethical conduct; or
(d) Does not have reasonable continuing
				  education requirements for its designees or certificants in order to maintain
				  the designation or certificate.
b. There is a rebuttable presumption that a
				  designating or certifying organization is not disqualified solely for purposes
				  of subdivision 18 a (4) of this subsection, when the organization has been
				  accredited by:
(1) The American National
				  Standards Institute;
(2) The
				  Institute for Credentialing Excellence (formerly 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 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 a person has special certification or training in
				  advising or servicing senior citizens or retirees, factors to be considered
				  shall include:
(1) Use of one or more words
				  such as "senior," "retirement," "elder," or like words, combined with one or
				  more words such as "certified," "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 section, a
				  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:
(1) Indicates seniority within the
				  organization; or
(2) Specifies an
				  individual's area of specialization within the organization.
For purposes of this subdivision d, "financial services
					 regulatory agency" includes an agency that regulates broker-dealers, investment
					 advisers, or investment companies as defined under § 3 (a)(1) of the
					 Investment Company Act of 1940 (
					 15 USC §
															80a-3(a)(1)
					 ).
e. Nothing in
				  this regulation shall limit the commission's authority to enforce existing
				  provisions of the law.