Standards of Conduct

Standards of Conduct. A person who is an investment adviser, an investment adviser representative, or a federal covered investment adviser is a fiduciary and has a duty to act primarily for the benefit of its clients. Acts, conduct, and practices, including, but not limited to, the following, are considered contrary to such duty and may constitute grounds for denial, suspension, revocation of registration, a bar, imposition of fines, or such other action authorized by statute: A. Recommending to a client to whom investment advisory, 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, risk tolerance, financial situation, and needs, and any other information known or acquired by the investment adviser investment adviser representative or federal covered investment adviser. B. Placing an order to purchase or sell a security for a client’s account without authority to do so. C. Placing an order to purchase or sell a security for a client’s account upon instruction from a third party without first having obtained a written third-party trading authorization from the client. D. 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. E. 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. F. Publishing, circulating, or distributing any advertisement which does not comply with Rule 206(4)-1 under the Investment Advisers Act of 1940 (17 C.F.R. § 206(4)-1), as now or hereafter amended. G. It is unlawful for any investment adviser or investment adviser representative to enter into, extend, or renew any investment advisory contract with an investment advisory client without a written advisory contract which provides: 1. The services to be provided, the term of the contract, the investment advisory fee, the formula for computing the fee, the amount of prepaid fee to be returned in the event of termination or non-performance of the contract, and whether any discretionary power is granted to the investment adviser or investment adviser representative; 2. That no direct or indirect assignment or transfer of the contract may be made by the investment adviser or investment adviser representative without the consent of the client or other party to the contract; 3. Whether the investment adviser or investment adviser representative will be compensated on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client; and 4. That the investment adviser, if a partnership, shall notify the client or other party to the investment contract of any change in the membership of the partnership within a reasonable time after the change. H. It is unlawful for any investment adviser or investment adviser representative to: 1. Include in any advisory contract a “hedge clause” or any other language which may lead a client to believe that legal rights have been restricted or waived. 2. Include 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. 3. Enter into, extend, or renew any advisory contract contrary to the provisions of Section 205 of the Investment Advisers Act of 1940. This provision shall apply to all investment advisers and investment adviser representatives registered or required to be registered under this Act, notwithstanding whether such adviser or representative would be exempt from federal registration pursuant to Section 203(b) of the Investment Advisers Act of 1940. I. Performance Fees. It is unlawful for any investment adviser or investment adviser representative to enter into, extend, or renew an investment advisory contract which provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds, or any portion of the funds, of the client unless the following conditions are met. 1. The client entering into the contract must be: a. A natural person or a company who, immediately after entering into the contract, has at least Seven Hundred Fifty Thousand Dollars ($750,000.00) under the management of the investment adviser; or b. A person who the investment adviser and its investment adviser representatives reasonably believe, immediately before entering into the contract, is a natural person or a company whose net worth, at the time the contract is entered into, exceeds One Million Five Hundred Thousand Dollars ($1,500,000.00). The net worth of a natural person may include assets held jointly with that person’s spouse. 2. The compensation paid to the investment adviser with respect to the performance of any securities over a given period must be based on a formula with the following characteristics: a. In the case of securities for which market quotations are readily available within the meaning of Rule 2a-4(a)(1) under the Investment Company Act of 1940 (Definition of “Current Net Asset Value” for Use in Computing Periodically the Current Price of Redeemable Security), the formula must include the realized capital losses and unrealized capital depreciation of the securities over the period; b. In the case of securities for which market quotations are not readily available within the meaning of Rule 2a-4(a)(1) under the Investment Company Act of 1940, the formula must include: i. The realized capital losses of securities over the period; and ii. If the unrealized capital appreciation of the securities over the period is included, the unrealized capital depreciation of the securities over the period; and c. The formula must provide that any compensation paid to the investment adviser under this Rule is based on the gains less the losses (computed in accordance with Subsections (I)(2)(a) and (b) of this Rule) in the client’s account for a period of not less than one (1) year. 3. Before entering into the advisory contract and in addition to the requirements of Form ADV, the investment adviser must disclose in writing to the client or the client’s independent agent all material information concerning the proposed advisory arrangement, including the following: a. That the fee arrangement may create an incentive for the investment adviser to make investments that are riskier or more speculative than would be the case in the absence of a performance fee. b. Where relevant, that the investment adviser may receive increased compensation with regard to unrealized appreciation as well as realized gains in the client’s account. c. The periods that will be used to measure investment performance throughout the contract and their significance in the computation of the fee. d. The nature of any index that will be used as a comparative measure of investment performance, the significance of the index, and the reason the investment adviser believes that the index is appropriate. e. Where the investment adviser’s compensation is based in part on the unrealized appreciation of securities for which market quotations are not readily available within the meaning of Rule 2a-4(a)(1) under the Investment Company Act of 1940, how the securities will be valued and the extent to which the valuation will be independently determined. 4. The investment adviser and any investment adviser representative who enters into the contract must reasonably believe, immediately before entering into the contract, that the contract represents an arm’s length arrangement between the parties and that the client (or in the case of a client which is a company as defined in Rule 6.25(L)(4), the person representing the company), alone or together with the client’s independent agent, understands the proposed method of compensation and its risks. The representative of a company may be a partner, director, officer, employee of the company or the trustee, where the company is a trust, or any other person designated by the company or trustee, but must satisfy the definition of client’s independent agent set forth in Rule 6.25(L)(3). J. Any person entering into or performing an investment advisory contract under this Rule is not relieved of any obligations under Section 75-71-502(b) of the Act or any other applicable provision of the Act or any rule or order thereunder. K. Nothing in this Rule shall relieve a client’s independent agent from any obligation to the client under applicable law. L. The following definitions apply for the purposes of this Rule: 1. Affiliate shall have the same definition as in Section 2(a)(3) of the Investment Company Act of 1940. 2. Assignment, as used in Subsection (G)(2) of this Rule, includes, but is not limited to, any transaction or event that results in any change to the individuals or entities with the power, directly or indirectly, to direct the management or policies of or to vote more than fifty percent (50%) of any class of voting securities of, the investment adviser or federal covered investment adviser as compared to the individuals or entities who had such power as of the date when the contract was first entered into, extended, or renewed. 3. Client’s Independent Agent means any person who agrees to act as an investment advisory client’s agent in connection with the contract; the definition does not include: a. The investment adviser relying on this Rule; b. An affiliated person of the investment adviser or an affiliated person of an affiliated person of the investment adviser, including an investment adviser representative; c. An interested person of the investment adviser; d. A person who receives, directly or indirectly, any compensation in connection with the contract from the investment adviser, an affiliated person of the investment adviser, an affiliated person of an affiliated person of the investment adviser, or an interested person of the investment adviser; or e. A person with any material relationship between himself (or an affiliated person of that person) and the investment adviser (or an affiliated person of the investment adviser) that exists or has existed at any time during the past two (2) years. 4. Company means a corporation, partnership, association, joint stock company, trust, any organized group of persons, whether incorporated or not, or any receiver, trustee in a case under Title 11 of the United States Code, or similar official or any liquidating agent for any of the foregoing, in his capacity as such. The term shall not include: a. A company required to be registered under the Investment Company Act of 1940 but which is not so registered; b. A private investment company (for purposes of this Subsection (L)(4)(b), a private investment company is a company which would be defined as an investment company under Section 3(a) of the Investment Company Act of 1940 but for the exception from that definition provided by Section 3(c)(1) of that Act); c. An investment company registered under the Investment Company Act of 1940; or d. A business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940, unless each of the equity owners of any such company, other than the investment adviser entering into the contract, is a natural person or a company within the meaning of Subsection (L)(4) of this Rule. 5. Interested Persons means: a. Any member of the immediate family of any natural person who is an affiliated person of the investment adviser. b. A business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940, unless each of the equity owners of any such company, other than the investment adviser entering into the contract, is a natural person or a company within the meaning of Subsection (L)(4) of this Rule. i. One-tenth (1/10) of one percent (1%) of any class of outstanding securities of the investment adviser or a controlling person of the investment adviser; or ii. Five percent (5%) of the total assets of the person seeking to act as the client’s independent agent. c. Any person or partner or employee of any person who, at any time since the beginning of the last two (2) fiscal years, has acted as legal counsel for the investment adviser. M. 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. Discretionary power does not include a power relating 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. N. 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. O. 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 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. P. 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. Q. 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 adviser, and the sophistication and bargaining power of the client. R. 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 employees of the same, or affiliated persons, which could reasonably be expected to impair the rendering of unbiased and objective advice, including, but not limited to: 1. Compensation arrangements connected with advisory services to clients that are in addition to compensation from such clients for such services; and 2. 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. S. Guaranteeing a client that a specific result will be achieved with advice rendered. T. Disclosing the identity, investments, or other financial information of any client or former client to a third party unless required by law to do so or unless consented to by the client or former client. U. 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 the safekeeping requirements of Subsections 6.35(A)(1) through (7). V. Paying a cash fee, directly or indirectly, to a solicitor with respect to solicitation activities in a manner which does not comply with Rule 6.31. W. Failing to disclose to any client or prospective client all material facts with respect to the financial and disciplinary information required to be disclosed under Rule 206(4)-4 under the Investment Advisers Act of 1940 (17 C.F.R. § 275.206(4)-4), as now or hereafter amended. X. 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 client’s consent to the transaction. 1. The prohibitions of this Subsection shall not apply to any transaction with a customer of a broker-dealer if the broker-dealer is not acting as an investment adviser in relation to the transaction. 2. The prohibitions of this Subsection shall not apply to any transaction with a customer of a broker-dealer if the broker-dealer acts as an investment adviser solely: a. By means of publicly distributed written materials or publicly made oral statements; b. By means of written materials or oral statements not purporting to meet the objectives or needs of specific individuals or accounts; c. Through the issuance of statistical information containing no expressions of opinion as to the investment merits of a particular security; or d. Any combination of the foregoing services. 3. 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 the Act. 4. The following definitions apply for purposes of this Rule: a. Publicly Distributed Written Materials means written materials which are distributed to thirty-five (35) or more persons who pay for those materials. b. Publicly Made Oral Statements means oral statements made simultaneously to thirty-five (35) or more persons who pay for access to those statements. 5. The prohibitions of this Rule shall not apply to an investment adviser effecting an agency cross transaction for an advisory client provided the following conditions are met: a. The advisory client executes a written consent prospectively authorizing the investment adviser to effect agency cross transactions for such client. b. Before obtaining such written consent from the client, the investment adviser makes full written disclosure to the client that, with respect to agency cross transactions, the investment adviser will act as broker-dealer for, receive commissions from, and have a potentially conflicting division of loyalties and responsibilities regarding both parties to the transactions. c. At or before the completion of each agency cross transaction, the investment adviser or any other person relying on this Rule sends the client a written confirmation. The written confirmation shall include: i. A statement of the nature of the transaction; ii. The date the transaction took place; iii. An offer to furnish, upon request, the time when the transaction took place; and iv. The source and amount of any other remuneration the investment adviser received or will receive in connection with the transaction. In the case of a purchase, if the investment adviser was not participating in a distribution, or, in the case of a sale, if the investment adviser was not participating in a tender offer, the written confirmation may state whether the investment adviser has been receiving or will receive any other remuneration and that the investment adviser will furnish the source and amount of such remuneration to the client upon the client’s written request. d. At least annually, and with or as part of any written statement or summary of the account from the investment adviser, the investment adviser or any other person relying on this Rule sends each client a written disclosure statement identifying: i. The total number of agency cross transactions during the period for the client since the date of the last such statement or summary; and ii. The total amount of all commissions or other remuneration the investment adviser received or will receive in connection with agency cross transactions for the client during the period. 6. Each written disclosure and confirmation required by this Rule must include a conspicuous statement that the client may revoke the written consent required under Subsection (X)(5)(a) of this Rule at any time by providing written notice to the investment adviser. 7. No agency cross transaction may be effected in which the same investment adviser recommended the transaction to both any seller and any purchaser. 8. For purposes of this Rule, agency cross transaction for an advisory client means a transaction in which a person acts as an investment adviser in relation to a transaction in which the investment adviser, or any person controlling, controlled by, or under common control with such investment adviser, including an investment adviser representative, acts as a broker-dealer for both the advisory client and another person on the other side of the transaction. When acting in such capacity, such person is required to be registered as a broker- dealer in this state unless excluded from the definition. 9. Nothing in this Rule shall be construed to relieve an investment adviser or investment adviser representative from acting in the best interests of the client, including fulfilling his duty with respect to the best price and execution for the particular transaction for the client, nor shall it relieve any investment adviser or investment adviser representative of any other disclosure obligations imposed by the Act. Y. Failing to establish, maintain, and enforce written policies and procedures reasonable designed to prevent the misuse of material nonpublic information in violation of Section 204A of the Investment Advisers Act of 1940. Z. 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. AA. Exercising voting authority with respect to client securities in a manner which does not comply with Rule 206(4)-6 under the Investment Advisers Act of 1940. BB. Engaging in any act, practice, or course of business which is deceptive, unethical, dishonest, or manipulative in contravention 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 Advisers Act of 1940. CC. 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. DD. Engaging in other conduct such as forgery, embezzlement, non-disclosure, incomplete disclosure, misstatement of material facts, or manipulative or deceptive practices. EE. Accessing a client’s account by using the client’s own unique identifying information (such as username and password). This rule is not intended to apply to data aggregation software where: 1. The investment adviser does not know, or have access to, the client’s password(s), 2. There is an agreement between the data aggregation software company and the custodian(s)/online account platform which permits this “back-door” access; and 3. The data is read-only (i.e., the investment adviser can only view the information and cannot effectuate any changes to the client’s underlying account(s)). FF. Failing to establish, maintain, and enforce a required policy or procedure.