Ohio Law & Administrative Rule 1301:6-3-44 - Investment Adviser and Investment Adviser Representative Fraudulent Practices

(A) Advertisements by investment advisers and investment adviser representatives.

(1) It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of section 1707.44 of the Revised Code for any investment adviser licensed or required to be licensed under Chapter 1707. of the Revised Code, or any investment adviser representative employed by or associated with an investment adviser licensed or required to be licensed under Chapter 1707. of the Revised Code, directly or indirectly, to publish, circulate, or distribute any advertisement:

(a) Which refers, directly, or indirectly, to any testimonial of any kind concerning the investment adviser or investment adviser representative or concerning any advice, analysis, report or other service rendered by the investment adviser or investment adviser representative; or

(b) Which refers, directly or indirectly, to past specific recommendations of the investment adviser or investment adviser representative which were or would have been profitable to any person; provided, however, that this shall not prohibit an advertisement which sets out or offers to furnish a list of all recommendations made by the investment adviser or investment adviser representative within the immediately preceding period of not less than one year if the advertisement, and the list if it is furnished separately:

(i) States the name of each security recommended, the date and nature of each recommendation including, but not limited to, whether to buy, sell or hold, the market price at that time, the price at which the recommendation was to be acted upon, and the market price of each security as of the most recent practicable date; and

(ii) Contains the following cautionary legend on the first page thereof in print or type as large as the largest print or type used in the body or text thereof:

“It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list”;

or

(c) Which represents, directly or indirectly, that any graph, chart, formula or other device being offered can in and of itself 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 his 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 difficulties with respect to its use; or

(d) Which contains any statement to the effect that any report, analysis, or other service will be furnished free or without charge, unless the report, analysis or other service actually is or will be furnished entirely free and without any condition or obligation, directly or indirectly; or

(e) Which contains any untrue statement of a material fact, or which is otherwise false or misleading.

(2) For the purposes of this rule the term “advertisement” shall include any notice, circular, letter or other written communication or any communication by electronic means, including but not limited to e-mail, the internet, any social media sites, CD-ROM or DVD, which are disseminated to more than one person, or any notice or other announcement in any publication or by radio or television, which offers:

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(a) Any analysis, report, or publication concerning securities, or which is to be used in making any determination as to when to buy or sell any security, or which security to buy or sell; or

(b) 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

(c) Any other investment advisory service with regard to securities.

(B) Custody or possession of funds or securities of clients.

(1) Safekeeping required. It shall constitute a fraudulent, deceptive or manipulative act, practice or course of business within the meaning of section 1707.44 of the Revised Code for any investment adviser licensed or required to be licensed under Chapter 1707. of the Revised Code, or any investment adviser representative employed by or associated with an investment adviser licensed or required to be licensed under Chapter 1707. of the Revised Code to have custody of client funds or securities unless:

(a) Qualified custodian. A qualified custodian maintains the funds and securities:

(i) In a separate account for each client under that client’s name; or

(ii) In accounts that contain only the investment adviser’s or investment adviser representative’s clients’ funds and securities, under the investment adviser’s or investment adviser representative’s name as agent or trustee for the clients.

(b) Notice to clients. If an account is opened with a qualified custodian on a client’s behalf, either under the client’s name or under the investment adviser’s or investment adviser representative’s name as agent, the client must be notified promptly in writing by the investment adviser or investment adviser representative when the account is opened and following any changes to this information, of the qualified custodian’s name, address, and the manner in which the funds or securities are maintained; and

(c) Account statements to clients.

(i) By qualified custodian. An investment adviser or investment adviser representative has a reasonable basis for believing that the qualified custodian sends, to each of the investment adviser or investment adviser representative’s clients for which the qualified custodian maintains funds or securities, at least quarterly, an account statement, identifying the amount of funds and of each security in the account at the end of the period setting forth all transactions in the account during that period; or

(ii) By adviser.

(a) The investment adviser or investment adviser representative sends a quarterly account statement to each of the investment adviser or investment adviser representative’s clients for whom the investment adviser or investment adviser representative has custody of funds or securities, identifying the amount of funds and of each security of which the investment adviser or investment adviser representative has custody at the end of the period and setting forth all transactions in the account during that period;

(b) An independent public accountant verifies all of those funds and securities by actual examination at least once each calendar year at a time chosen by the accountant without prior notice to the investment adviser or investment adviser representative and that is irregular from year to year, and files a certificate on form ADV-E with the division within thirty days after the examination, stating that it has examined the funds and securities and describing the nature and extent of the examination; and

(c) The independent public accountant, upon finding any material discrepancies during the course of the examination, notifies the division within one business day of the finding, by means of a facsimile transmission or electronic mail, followed by first class mail.

(iii) Special rule for limited partnerships, limited liability companies, pooled investment vehicles and trusts. If the investment adviser or investment adviser representative is a general partner of a limited partnership, managing member of a limited liability company, or holds a comparable position for another type of pooled investment vehicle, or is a trustee of a trust, the account statements required under paragraph (B)(1)(c)(i) or (B)(1)(c)(ii) of this rule must be sent to each limited partner or member or other beneficial owner, or to their independent representative.

(iv) For purposes of paragraph (B)(1)(c)(i) of this rule, an investment adviser or investment adviser representative would have a reasonable basis for believing that the qualified custodian has sent an account statement to clients, if the qualified custodian provides the investment adviser or investment adviser representative with a copy of the account statement that was delivered to the investment adviser’s or investment adviser representative’s clients.

(v) For purposes of paragraph (B)(1)(c)(i) of this rule, a qualified custodian may use a service provider to deliver account statements, as long as the statements are not routed through the investment adviser or investment adviser representative.

(d) Independent representatives. A client may designate an independent representative to receive, on his behalf, notices and account statements as required under paragraphs (B)(1)(b) and (B)(1)(c) of this rule;

(2) Exceptions.

(a) With respect to shares of an open-end investment company as defined in Section 5(a)(1) of the Investment Company Act of 1940, as amended, an investment adviser or investment adviser representative may use the open-end investment company’s transfer agent in lieu of a qualified custodian for purposes of complying with paragraph (B)(1) of this rule;

(b) Certain privately offered securities.

(i) An investment adviser and investment adviser representative are not required to comply with paragraph (B)(1) of this rule with respect to securities that are:

(a) Acquired from the issuer in a transaction or chain of transactions not involving any public offering;

(b) Uncertificated, and ownership thereof is recorded only on books of the issuer or its transfer agent in the name of the client; and

(c) Transferable only with prior consent of the issuer or holders of the outstanding securities of the issuer.

(ii) Notwithstanding paragraph (B)(2)(b)(i) of this rule, the provisions of paragraph (B)(2)(b) of this rule are available with respect to securities held for the account of a limited partnership or limited liability company, or other type of pooled investment vehicle, only if the limited partnership, limited liability company, or other type of pooled investment vehicle is audited, and the audited financial statements are distributed, as described in paragraph (B)(2)(c) of this rule.

(c) Limited partnerships subject to annual audit. An investment adviser or investment adviser representative is not required to comply with paragraph (B)(1)(c) of this rule with respect to the account of a limited partnership, limited liability company, or another type of pooled investment vehicle, that is subject to audit, as defined in section 2(d) of article 1 of regulation S-X, as amended, at least annually and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners or members or other beneficial owners, within one hundred twenty days of the end of its fiscal year; and

(d) Registered investment companies. An investment adviser or investment adviser representative is not required to comply with paragraph (B)(1) of this rule with respect to the account of an investment company registered with the securities and exchange commission under the Investment Company Act of 1940, as amended.

(3) Definitions. For the purpose of this rule:

(a) “Custody” means holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them. Custody includes:

(i) Possession or control of client funds or securities, but not checks drawn by clients and made payable to third parties, unless the investment adviser or investment adviser representative receives the funds or securities inadvertently and returns them to the sender within three business days of receipt;

(ii) Any arrangement, including a general power of attorney, a standing letter of instruction, or other similar asset transfer authorization arrangement, under which the investment adviser or investment adviser representative are authorized or permitted to withdraw client funds or securities maintained with a custodian upon the investment adviser’s or investment adviser representative’s instruction to the custodian; and

(iii) Any capacity including as general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust, that gives the investment adviser or investment adviser representative legal ownership of or access to client funds or securities.

(b) “Independent representative” means a person that:

(i) Acts as agent for an advisory client, including in the case of a pooled investment vehicle, for limited partners of a limited partnership or members of a limited liability company, or other beneficial owners of another type of pooled investment vehicle, and by law or contract is obliged to act in the best interest of the advisory client or the limited partners or members, or other beneficial owners;

(ii) Does not control, is not controlled by, and is not under common control with the investment adviser; and

(iii) Does not have, and has not had within the past two years, a material business relationship with the investment adviser.

(c) “Qualified custodian” means:

(i) A bank;

(ii) A broker-dealer registered under section 15(b)(1) of the Securities Exchange Act of 1934, as amended, holding the client assets in customer accounts;

(iii) A futures commission merchant registered under section 4f(a) of the Commodity Exchange Act, 7 U.S.C.A. 1, as amended, holding the client assets in customer accounts, but only with respect to clients’ funds and security futures, or other securities incidental to transactions in contracts for the purchase or sale of a commodity for future delivery and options thereon; and

(iv) A foreign financial institution that customarily holds financial assets for its customers, provided that the foreign financial institution keeps the advisory clients’ assets in customer accounts segregated from its proprietary assets.

(C) Cash payments for client solicitations. It shall constitute a fraudulent, deceptive or manipulative act, practice or course of business within the meaning of section 1707.44 of the Revised Code for any investment adviser licensed or required to be licensed under Chapter 1707. of the Revised Code, or any investment adviser representative employed by or associated with an investment adviser licensed or required to be licensed under Chapter 1707. of the Revised Code:

(1) Except as provided in paragraph (C)(2) of this rule, to pay a cash fee, directly or indirectly, to a solicitor for solicitation activities, unless:

(a) The investment adviser or investment adviser representative is properly licensed with the division or is properly excepted from licensure;

(b) The cash fee is paid pursuant to written agreement to which the investment adviser or investment adviser representative is a party;

(c) The solicitor:

(i) Is not subject to an order by the securities and exchange commission under section 203(f) of the Investment Advisers Act of 1940, as amended; or

(ii) Has not been convicted within the previous ten years of any felony or misdemeanor involving conduct described in sections 203(e)(2)(A) through 203(e)(2)(D) of the Investment Advisers Act of 1940, as amended; or

(iii) Has not been found by the securities and exchange commission to have engaged, or has not been convicted of engaging, in any of the conduct specified in paragraphs (1), (5) or (6) of section 203(e) of the Investment Advisers Act of 1940, as amended; or

(iv) Is not subject to an order, judgment or decree described in section 203(e)(4) of the Investment Advisers Act of 1940, as amended; or

(v) Is not subject to a final order issued by a state securities regulatory authority.

(d) The investment adviser or investment adviser representative and the solicitor have entered into a written agreement that:

(i) Describes the solicitor’s activities on behalf of the investment adviser or investment adviser representative and the compensation received;

(ii) Contains an undertaking by the solicitor to perform his duties under the agreement consistent with the instructions of the investment adviser or investment adviser representative and the provisions of Chapter 1707. of the Revised Code and the rules adopted by the division thereunder;

(iii) Requires the solicitor, when performing any solicitation activities described in the agreement, to provide the client with:

(a) A current copy of the investment adviser’s written disclosure statement required by paragraph (G) of rule 1301:6-3-15.1 of the Administrative Code, and

(b) A separate solicitor’s written disclosure document as described in paragraph (C)(4)(d) of this rule.

(e) The investment adviser or investment adviser representative receives from the client before entering into any written or oral investment advisory contract with the client, a signed and dated acknowledgment that the client received the investment adviser’s or investment adviser representative’s written disclosure statement and the solicitor’s written disclosure document; and

(f) The investment adviser or investment adviser representative makes a good faith effort to ascertain whether the solicitor has complied with the agreement, and has a reasonable basis for believing that the solicitor has so complied.

(2) The requirements in paragraph (C)(1) of this rule do not apply if:

(a) The cash fee is paid for the solicitation of impersonal investment advice only; or

(b) The solicitor:

(i) Is a partner, officer, director or employee of:

(a) The investment adviser; or

(b) A person which controls, is controlled by, or is under common control with, the investment adviser, and

(ii) Discloses the nature of the solicitor’s relationship with the investment adviser or investment adviser representative to the client at the time of the solicitation or referral.

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(3) Nothing in this rule relieves any person of any fiduciary or other obligation under any law.

(4) For purposes of this rule:

(a) “Client” includes any prospective client.

(b) “Impersonal investment advice” means investment advisory services provided by means of written material or oral statements that do not purport to meet the objectives or needs of specific individuals or accounts.

(c) “Solicitor” means any person who, directly or indirectly, solicits any client for, or refers any client to, an investment adviser or investment adviser representative.

(d) “Solicitor’s written disclosure document” means a document containing the following information:

(i) The name of the solicitor;

(ii) The name of the investment adviser or investment adviser representative;

(iii) The nature of the relationship, including an affiliation, between the solicitor and the investment adviser or investment adviser representative;

(iv) A statement that the solicitor will be compensated for his solicitation services by the investment adviser or investment adviser representative;

(v) The terms of the compensation arrangement, including a description of the compensation paid or to be paid to the solicitor;

(vi) The amount, if any, the investment adviser or investment adviser representative will charge the client for solicitation services, in addition to the advisory fee; and

(vii) The amount of any difference between the advisory fee the investment adviser or investment adviser representative charged the client and the advisory fees charged other clients, if the difference is attributable to an arrangement between the investment adviser or investment adviser representative and a solicitor.

(5) An investment adviser or investment adviser representative shall retain in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the last entry was made on the record, a copy of each written agreement, each acknowledgment, and each solicitor disclosure document required by this rule. The provisions of paragraph (C)(5) of this rule shall not apply to any investment adviser that:

(a) Maintains its principal place of business in a state other than Ohio:

(b) Is registered as an investment adviser in the state where it maintains its principal place of business; and

(c) Is in compliance with the record keeping requirements of the state in which the investment adviser maintains its principal place of business.

(D) Financial and disciplinary information that investment advisers and investment adviser representatives must disclose to clients.

(1) It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of section 1707.44 of the Revised Code for any investment adviser licensed or required to be licensed under Chapter 1707. of the Revised Code, or any investment adviser representative employed by or associated with an investment adviser licensed or required to be licensed under Chapter 1707. of the Revised Code, to fail to disclose to any client or prospective client all material facts with respect to:

(a) A financial condition of the investment adviser or investment adviser representative that is reasonably likely to impair the ability of the investment adviser or investment adviser representative to meet contractual commitments to clients, if the investment adviser or investment adviser representative has discretionary authority, express or implied, or custody over such client’s funds or securities, or requires prepayment of advisory fees of more than five hundred dollars from such client, six months or more in advance; or

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

(2) It shall constitute a rebuttable presumption that the following legal or disciplinary events involving the investment adviser or investment adviser representative or a management person of the investment adviser, any of the foregoing being referred to as “person,” that were not resolved in the persons’ favor or subsequently reversed, suspended, or vacated are material within the meaning of paragraph (D)(1)(b) of this rule for a period of ten years from the time of the event:

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

(i) Was convicted, pleaded guilty or nolo contendere to a felony or misdemeanor, or is the named subject of a pending criminal proceeding, any of the foregoing referred to as “action,” and such action involved: an investment-related business, fraud, false statements, or omissions; wrongful taking of property; or bribery, forgery, counterfeiting, or extortion:

(ii) Was found to have been involved in a violation of an investment-related statute or regulation; or

(iii) Was the subject of any order, judgment, or decree permanently or temporarily enjoining the person from, or otherwise limiting the person from, engaging in any investment-related activity.

(b) 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:

(i) Was found to have caused an investment-related business to lose its authorization to do business; or

(ii) 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 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 otherwise significantly limiting the person’s investment-related activities.

(c) Self-regulatory organization proceedings in which the person:

(i) Was found to have caused an investment-related business to lose its authorization to do business; or

(ii) Was found to have been involved in a violation of the self-regulatory organization’s rules and was the subject of an order by the self-regulatory organization barring or suspending the person from membership or from association with other members, or expelling the person from membership; fining the person more than two thousand five hundred dollars or otherwise significantly limiting the person’s investment-related activities.

(3) The information required to be disclosed by paragraph (D)(1) of this rule shall be disclosed to clients promptly, and to prospective clients not less than forty-eight hours prior to entering into any written or oral investment advisory contract, or 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.

(4) For purposes of this rule:

(a) “Management person” means a person with power to exercise, directly or indirectly, a controlling influence over the management or policies of an adviser which is a company or to determine the general investment advice given to clients;

(b) “Found” means determined or ascertained by adjudication or consent in a final self-regulatory organization proceeding, administrative proceeding, or court action;

(c) “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, entity or person required to be registered under the Commodity Exchange Act, 7 U.S.C.A. 1, as amended, or fiduciary;

(d) “Involved” means acting or aiding, abetting, causing, counseling, commanding, inducing, conspiring with or failing reasonably to supervise another in doing an act;

(e) “Self-regulatory organization” or “SRO” means any national securities or commodities exchange, registered association, or registered clearing agency.

(5) For purposes of calculating the ten year period during which events are presumed to be material under paragraph (D)(2) of this rule, 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.

(6) Compliance with paragraph (D)(2) of this rule shall not relieve any investment adviser or investment adviser representative from the disclosure obligations of paragraph (D)(1) of this rule; compliance with paragraph (D)(1) of this rule, shall not relieve any investment adviser or investment adviser representative from any other disclosure requirement under Chapter 1707. of the Revised Code, the rules and regulations thereunder, or under any other federal or state law.

(7) Investment advisers and investment adviser representatives may disclose this information to clients and prospective clients in their “brochure,” the written disclosure statement to clients under paragraph (G) of rule 1301:6-3-15.1 of the Administrative Code; provided, that the delivery of the brochure satisfies the timing of disclosure requirements described in paragraph (D)(3) of this rule.

(E) General prohibitions.

(1) It shall be unlawful for any investment adviser licensed or required to be licensed under Chapter 1707. of the Revised Code, or any investment adviser representative employed by or associated with an investment adviser licensed or required to be licensed under Chapter 1707. of the Revised Code, to:

(a) Represent or imply in any manner whatsoever that the investment adviser or investment adviser representative has been sponsored, recommended, or approved, or that the abilities or qualifications of the investment adviser or investment adviser representative or the investment adviser or investment adviser representative have in any respect been passed upon by the state of Ohio, the department of commerce, the division or any other state or federal agency.

(b) Represent that the investment adviser or investment representative is an investment counsel or to use the name “investment counsel” as descriptive of the business or the investment adviser or investment adviser representative unless:

(i) The principal business consists of acting as an investment adviser or an investment adviser representative; and

(ii) A substantial part of the business consists of rendering investment supervisory services.

(c) Make a false representation to the division in an initial application for licensure, any subsequent application for license renewal, or in the course of any division inquiry into the conduct of the investment adviser’s or investment adviser representative’s business.

(d) Indirectly, or through or by any other person, do any act or thing which it would be unlawful for such person to do directly under the provisions of Chapter 1707. of the Revised Code or any rule adopted by the division thereunder.