Wis. Admin. Code Department of Financial Institutions DFI-Sec 5.06

Current through October 28, 2024

Section DFI-Sec 5.06 - Prohibited conduct

Except as otherwise provided in sub. (13), the following are deemed "dishonest or unethical business practices" or "taking unfair advantage of a client" by an investment adviser or an investment adviser representative under s. 551.412(4) (m), Stats., without limiting those terms to the practices specified in this section:

(1) Exercising any discretionary power in placing an order for the purchase or sale of securities for the account of a client without first obtaining written discretionary authority from the client 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.

(2) 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;

(3) Inducing trading in a client's account that is excessive in size or frequency in view of the financial resources and character of the account;

(4) Recommending to a client 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 and needs, and any other information known by the investment adviser;

(5) Placing an order to purchase or sell a security for the account of a client without authority to do so;

(6) Borrowing money or securities from, or lending money or securities to, a client, unless that client is a financial institution or institutional investor designated in s. 551.401(2) (b) or (c), Stats.

(7) Misrepresenting to any client, or prospective client, the qualifications of the investment adviser, investment adviser representative, federal covered investment adviser, or any employee, or person affiliated with the investment adviser, investment adviser representative or federal covered investment adviser, or misrepresenting the nature of the advisory services being offered or fees to be charged for such service, 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.

(8) Placing an order for the purchase or sale of a security if the security is not registered or the security or transaction is not exempt from registration under ch. 551, Stats.

(9) Placing an order for a client, or recommending that the client place an order, to purchase or sell a security through a broker-dealer or agent not registered under ch. 551, Stats., unless the client is a person described in s. 551.403(2) (a), Stats., or s. DFI-Sec 5.12.

(10) Recommending to a client that the client engage the services of a broker-dealer, agent or investment adviser not registered under ch. 551, Stats., unless the client is a person described in s. 551.403(2) (a), Stats., or s. DFI-Sec 5.12.

(11) Failing accurately to describe or disclose in advertising or other materials used in connection with the promotion or transaction of investment advisory services in this state, the identity of the investment adviser or the nature of the investment advisory services offered or the employment relationship between the investment adviser and its representatives. For purposes of this subsection, "other materials" include, but are not limited to, business cards, business stationery and display signs.

(12) Taking or having custody of client funds or securities without being in compliance with s. DFI-Sec 5.035 and the net worth requirement in s. DFI-Sec 5.02(2).

(13) The subsections of this section shall apply to an investment adviser representative of a federal covered investment adviser only to the extent permitted by section 203 (b) (2) of the investment advisers act of 1940, and only to the extent the prohibited conduct involves fraud or deceit.

(14) Providing a report or recommendation to any client prepared by someone other than the investment adviser, investment adviser representative or federal covered investment adviser without disclosing that fact. This prohibition does not apply to a situation where the investment adviser, investment adviser representative or federal covered investment adviser uses published research reports or statistical analyses to render advice or where an investment adviser, investment adviser representative or federal covered investment adviser orders such a report in the normal course of providing service.

(15) Charging a client an unreasonable fee.

(16) Failing to disclose to clients in writing before any advice is rendered any material conflict of interest relating to the investment adviser, investment adviser representative or federal covered investment adviser, or any of its employees, or affiliated persons which could reasonably be expected to impair the rendering of unbiased and objective advice including but not limited to:

(a) Compensation arrangements connected with investment advisory services to clients which are in addition to compensation from such clients for such services; and

(b) Charging a client an investment advisory fee for rendering investment advice when compensation for effecting securities transactions pursuant to such advice will be received by the investment adviser, investment adviser representative or federal covered investment adviser or its employees, or affiliated persons.

(17)

(a) While acting as principal for its own advisory account, to knowingly sell any security to or purchase any security from a client, or while acting as broker-dealer for a person other than the client, to knowingly effect any sale or purchase of any security for the account of the client, without disclosing to the client in writing before the completion of the transaction the capacity in which it is acting and obtaining the consent of the client to the transaction.

(b) The prohibitions of this subsection shall not apply to any transaction with a client of a broker-dealer if the broker-dealer is not acting as an investment adviser in relation to the transaction.

(c) The prohibitions of this subsection shall not apply to any transaction with a client of a broker-dealer if the broker-dealer acts as an investment adviser solely:

1. By means of publicly distributed written materials or publicly made oral statements;

2. By means of written materials or oral statements not purporting to meet the objectives or needs of specific individuals or accounts;

3. Through the issuance of statistical information containing no expressions of opinion as to the investment merits of a particular security; or

4. Any combination of the foregoing services.

(d) Publicly distributed written materials or publicly made oral statements shall disclose that, if the purchaser of the advisory communication uses the investment adviser's services in connection with the sale or purchase of a security which is a subject of the communication, the investment adviser may act as principal for its own account or as agent for another person. Compliance by the investment adviser with the foregoing disclosure requirement shall not relieve it of any other disclosure obligations under ch. 551, Stats.

(e) In this subsection:

1. "Publicly distributed written materials" means written materials which are distributed to 35 or more persons who pay for those materials.

2. "Publicly made oral statements" means oral statements made simultaneously to 35 or more persons who pay for access to those statements.

(18) Guaranteeing a client that a specific result will be achieved with advice rendered.

(19) Publishing, circulating or distributing any advertisement which directly or indirectly does any one of the following:

(a) Refers to any testimonial of any kind concerning the investment adviser, investment adviser representative or federal covered investment adviser, or concerning any advice, analysis, report, or other service rendered by such investment adviser or investment adviser representative.

(b) Refers to past specific recommendations of the investment adviser, investment adviser representative or federal covered investment adviser that were or would have been profitable to any person; except that an investment adviser or investment adviser representative may furnish or offer to furnish a list of all recommendations made by the investment adviser, investment adviser representative or federal covered investment adviser 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 such security.

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 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 that person's own decisions as to which securities to buy or sell, or when to buy or sell them, without prominently disclosing in such advertisement the limitations thereof and the difficulties with respect to its use.

(d) Represents that any report, analysis, or other service will be furnished for free or without charge, unless such 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 division has approved any advertisement.

(f) Contains any untrue statement of a material fact, or that is otherwise false or misleading.

(g) In this subsection, 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:

1. Any analysis, report, or publication concerning securities.

2. 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.

3. 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.

4. Any other investment advisory service with regard to securities.

(20) Making, in the solicitation of clients, any untrue statement of a material fact, or omitting to state a material fact necessary in order to make the statement made, in light of the circumstances under which they are made, not misleading.

(21) 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.

(22) Disclosing the identity, investments, or other financial information of any client or former client unless required by law to do so, or unless consented to by the client.

(23) Engaging in conduct or any act, indirectly or through or by any other person, which would be unlawful for such person to do directly under ch. 551, Stats., or any rule thereunder.

(24) Using any term or abbreviation thereof in a manner that misleadingly states or implies that a person has special expertise, certification, or training in financial planning, including the misleading use of a senior-specific certification or designation as set forth in ch. DFI-Sec 10.

(25) Paying a cash fee or any other economic benefit, directly or indirectly, in connection with solicitation activities unless the requirements of pars. (a) through (d) are met.

(a) The solicitor is registered as an investment adviser or investment adviser representative or is exempt from registration as provided for in s. DFI-Sec 5.13(2).

(b) The cash fee or any other economic benefit is paid by the investment adviser with respect to solicitation activities that are impersonal in nature in that they are provided solely by means of:

1. Written material or oral statements which do not purport to meet the objectives or needs of the specific client; or

2. Statistical information containing no expressions of opinions as to the merits of particular securities or investment advisers; or

3. Any combination of the foregoing services.

(c) The cash fee or any other economic benefit is paid pursuant to a written agreement to which the investment adviser is a party and all of the following conditions are met:

1. The written agreement;

a. Describes the solicitation or referral activities to be engaged in by the solicitor on behalf of the investment adviser and the cash fee or any other economic benefit to be received for such activities; and

b. Contains an undertaking by the solicitor to perform its duties under the agreement in a manner consistent with the instructions of the investment adviser and the provisions of ch. 551, Stats., and rules there under; and

c. Requires that the solicitor, at the time of any solicitation or referral activities for which a cash fee or any other economic benefit is paid or to be paid by the investment adviser, provide the client with a current copy of the investment adviser's disclosure document required under s. DFI-Sec 5.05(8) and a separate disclosure statement as described in par. (d), either in paper or electronic format; and

2. The investment adviser receives from the client, prior to or at the time of entering into any written investment advisory contract, a signed and dated acknowledgement of receipt of the investment adviser's written disclosure statement and the solicitor's written disclosure document; and

3. The investment adviser makes a bona fide effort and has a reasonable basis for believing that the solicitor has complied with the agreement; and

4. The requirements in subds. 1., 2. and 3. shall not apply if the solicitor is any of the following:

a. A partner, officer, director or employee of such investment adviser; or

b. A partner, officer, director or employee of a person that controls, is controlled by, or is under common control with such investment adviser, provided the status of the solicitor is disclosed to the client at the time of the solicitation or referral.

(d) The separate written disclosure document required to be furnished by the solicitor to the client pursuant to par. (c) 1. c. shall contain the following information:

1. The name of the solicitor;

2. The name of the investment adviser;

3. The nature of the relationship, including any affiliation, between the solicitor and the investment adviser;

4. A statement that the solicitor will be compensated for solicitation or referral services by the investment adviser;

5. The terms of the compensation arrangement including a description of the cash fee or any other economic benefit paid or to be paid to the solicitor; and

6. The amount of compensation the client will pay, if any, in addition to the advisory fees, and whether the cash fee or any other economic benefit paid to the solicitor will be added to the advisory fee, creating a differential with respect to the amount charged to other advisory clients who are not subject to the solicitor compensation arrangement.

(e) Nothing in this subsection shall be deemed to relieve any person of any fiduciary or other obligation to which such person may be subject under any law.

Wis. Admin. Code Department of Financial Institutions DFI-Sec 5.06

CR Register, December, 1977, No. 264, eff. 1-1-78; am. (intro.) and (1), renum. (2) to be (8) and am., CR (2) to (7), Register, December, 1980, No. 300, eff. 1-1-81; am. (9), CR (10), Register, December, 1986, No. 372, eff. 1-1-87; CR (11), Register, December, 1989, No. 408, eff. 1-1-90; am. (9), (10), Register, December, 1996, No. 492, eff. 1-1-97; am. (intro.), CR (12) and (13), Register, December, 1998, No. 516, eff. 1-1-99; am. (6), Register, December, 1999, No. 528, eff. 1-1-00; CR 04-074: am. (12) Register December 2004 No. 588, eff. 1-1-05; CR 08-077: am. (title), (intro.) to (6), (9), (10) and (13), r. and reCR (7), CR (14) to (23) Register December 2008 No 636, eff. 1-1-09; corrections in (9) and (10) made under s. 13.92(4) (b) 7, Stats., Register December 2008 No. 636; EmR0829: emerg. CR (14), eff. 9-18-08; CR 08-095: CR (24) Register March 2009 No. 639, eff. 4-1-09; CR 10-062: CR (25) Register September 2010 No. 657, eff. 10-1-10.