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Order Relating to Unethical Business Practices of Investment Advisers and Investment Advisor Representatives

WHEREAS, the North Dakota Securities Commissioner (Commissioner) is charged with the administration of the North Dakota Securities Act of 1951, as amended, (the "Act") and the North Dakota Administrative Rules regarding securities; and

WHEREAS, Section 1 0-04-03(2) of the Act provides in part that "the commissioner may from time to time make, amend, and rescind such rules, forms, and orders as are necessary under this chapter, including ......... "; and

WHEREAS, a person who is an investment adviser, a federal covered adviser, or an investment adviser representative is a fiduciary and has a duty to act primarily for the benefit of its clients. The provisions of this Order apply to federal covered advisers only to the extent that the conduct alleged is fraudulent or deceptive under Section 10-04-10.1 of the Act, or to the extent otherwise permitted by the National Securities Markets Improvement Act of 1996 (Pub. l. No. 1 04-290). The extent and nature of this duty will vary according to the nature of the relationship between an investment adviser, a federal covered adviser, an investment adviser representative and their clients and the circumstances of each case.

WHEREAS, the Commissioner finds that the issuance of this Order is necessary and appropriate in the public interest and is issued with a view toward achieving uniformity.

THEREFORE, IT IS HEREBY ORDERED, pursuant to Section 10-04-03(2) of the Act, that an investment adviser, a federal covered adviser, or an investment adviser representative shall not engage in unethical business practices, including the following:

  • Recommending to a client to whom 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 and needs, and any other information known by the investment adviser or investment adviser representative.
  • 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 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.
  • 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 in light of the fact that an adviser in such situations can directly benefit from the number of securities transactions effected in a client's account. The order appropriately forbids an excessive number of transaction orders to be induced by an adviser or investment adviser representative for a "customer's account."
  • Placing an order to purchase or sell a security for the account of a client without authority to do so.
  • 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 trading authorization from the client.
  • 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.
  • 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.
  • To misrepresent to any advisory client, or prospective advisory client, the qualifications of the investment adviser or any employee of the investment adviser, or to misrepresent 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.
  • Providing a report or recommendation to any advisory client prepared by someone other than the adviser without disclosing that fact. (This prohibition does not apply to a situation where the adviser uses published research reports or statistical analyses to render advise or where an adviser orders such a report in the normal course of providing service.)
  • Charging a client an unreasonable advisory fee.
  • Failing to disclose to clients in writing before any advise is rendered any material conflict of interest relating to the adviser or any of its employees which could reasonable be expected to impair the rendering of unbiased and objective advise including:
    • Compensation arrangements connected with advisory services to clients which are in addition to compensation from such clients for such services; and
    • Charging a client an advisory fee for rendering advise when a commission for executing securities transactions pursuant to such advice will be received by the adviser or its employees.
  • Guaranteeing a client that a specific result will be achieved (gain or no loss) with advise which will be rendered.
  • Publishing, circulating or distributing any advertisement which does not comply with Rule 206 (4)-1 under the Investment Advisers Act of 1940.
  • Disclose the identity, affairs, or investments of any client unless required by law to do so, unless consented to by the client.
  • Taking any action, directly or indirectly, with respect to those securities or funds in which any client has any beneficial interest, where the investment adviser has custody or possession of such securities or funds when the adviser's action is subject to and does not comply with requirements of Reg. 206 (4)-2 under the Investment Advisers Act of 1940.
  • Entering into, extending or renewing any investment advisory contract unless such 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 non-performance, whether the contract grants discretionary power to the adviser and that no assignment of such contract shall be made by the investment adviser without the consent of the other party to the contract.
  • 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 Section204A of the Investment Advisers Act of 1940.
  • Entering into, extending, or renewing any advisory contract contrary to the provisions of Section 205 of the Investment Advisers Act of 1940. This provision shall apply to all advisers registered or required to be registered under this Act, notwithstanding whether such adviser would be exempt from federal registration pursuant to Section 203 (b) of the Investment Advisers Act of 1940.
  • 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.
  • Engaging in any act, practice, or course of business which is fraudulent, deceptive, or manipulative in contrary to the provisions of Section 206 (4) of the Investment Advisers Act of 1940, notwithstanding the fact that such investment adviser is not registered or required to be registered under Section 203 of the Investment Act of 1940.
  • 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 the provisions of this Act or any rule or regulation thereunder. The conduct set forth above is not inclusive. Engaging in other conduct such as forgery, embezzlement, theft, nondisclosure, incomplete disclosure, deceptive practices, or aiding and abetting shall be deemed an unethical business practice. The federal statutory and regulatory provisions referenced herein shall apply to investment advisers, federal covered advisers, and investment adviser representatives, to the extent permitted by the National Securities Markets Improvement Act of 1996 (Pub. l. No. 104-290).

This Order shall remain in effect until amended or rescinded by the Commissioner.

Dated at Bismarck, North Dakota, this 2nd day of January, 2002.

KAREN J.TYLER SECURITIES COMMISSIONER STATE OF NORTH DAKOTA