CHAPTER 404. PROHIBITED ACTIVITIES; INVESTMENT ADVISERS AND INVESTMENT ADVISER REPRESENTATIVES

§ 404.010. Advertisements by investment advisers and investment adviser representatives.

 (a)  It shall constitute a fraudulent, deceptive or manipulative act, practice or course of conduct within the meaning of section 404 of the act (70 P. S. §  1-404), for any investment adviser or investment adviser representative, directly or indirectly, to publish, circulate or distribute any advertisement:

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

   (2)  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 does not prohibit an advertisement which sets forth or offers to furnish a list of all recommendations made by the investment adviser or investment adviser representative for the 12-month period immediately preceding the date of the publication of the advertisement, and which:

     (i)   Includes the name of each such security recommended, the date and nature of each such recommendation (for example, whether to buy, sell or hold) the market price at the time, the price at which the recommendation was to be acted upon, and the current market price of each such security.

     (ii)   Contains the following cautionary legend prominently displayed on the first page thereof in print or type as large as the largest print or type used in the body or text stating: ‘‘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.’’

   (3)  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 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.

   (4)  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 absolutely without condition or obligation.

   (5)  Which contains any untrue statement of a material fact, or which is otherwise false or misleading in any material respect, including the failure to disclose compensation (including free or discounted securities) received directly or indirectly in connection with making a recommendation concerning a specific security.

   (6)  Which recommends the purchase or sale of any security unless the investment adviser or investment adviser representative simultaneously offers to furnish to any person upon request a tabular presentation of:

     (i)   The total number of shares or other units of the security held by the investment adviser or investment adviser representative for its own account or for the account of officers, directors, trustees, partners or affiliates of the investment adviser or for discretionary accounts of the investment adviser or investment adviser representative maintained for clients.

     (ii)   The price or price range at which the securities listed in subparagraph (i) were purchased.

     (iii)   The date or range of dates during which the securities listed in response to subparagraph (i) were purchased.

 (b)  For the purpose 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 publication, by radio or television, or by electronic means, which offers:

   (1)  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.

   (2)  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.

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

 (c)  For the purpose of this section, the term ‘‘client’’ means any person to whom the investment adviser or investment adviser representative has given investment advice for which the investment adviser or investment adviser representative has received compensation.

 (d)  This section does not apply to Federally covered advisers unless the conduct otherwise is actionable under section 401(a) or (c) or 404 of the act (70 P. S. §  1-401(a) or (c) or 1-404).

   The provisions of this §  404.010 amended under sections 404(a) and 609(a) of the Pennsylvania Securities Act of 1972 (70 P. S. § §  1-404(a) and 1-609(a)).

 (a)  Failure of an investment adviser to provide each advisory client or prospective advisory client the disclosure required by this section shall constitute a fraudulent, deceptive or manipulative act, practice or course of business, within the meaning of section 404 of the act (70 P. S. §  1-404).

 (b)  An investment adviser registered under section 301 of the act (70 P. S. §  1-301) shall offer and deliver to each client and prospective client a current firm brochure and one or more supplements as required by this section. The brochure and supplements shall contain the information required by Part 2 of Form ADV (CFR 279.1).

 (c)  An investment adviser shall deliver to each client and prospective client all of the following:

   (1)  A current firm brochure.

   (2)  Current brochure supplements for each investment adviser representative who will provide advisory services to a client.

 (d)  The firm brochure and one or more supplements required by this section shall be delivered in compliance with one of the following:

   (1)  Not less than 48 hours prior to entering into any investment advisory contract with the client or prospective client.

   (2)  At the time of entering into a contract, if the advisory client has a right to terminate the contract without penalty within 5 business days after entering into the contract.

 (e)  An investment adviser shall, at least once a year, without charge, deliver or offer in writing to deliver to each of its clients the current brochure and any current brochure supplements required by subsection (b). If a client accepts a written offer, the investment adviser shall send to that client the current brochure and supplements within 7 days after the investment adviser is notified of the acceptance.

 (f)  If, as an investment adviser, the adviser is the general partner of a limited partnership, the manager of a limited liability company, or the trustee of a trust, then for purposes of this section the investment adviser shall treat each of the partnership’s limited partners, the company’s members or the trust’s beneficial owners as a client. For the purposes of this section, a limited liability partnership or limited liability limited partnership is a ‘‘limited partnership.’’

 (g)  If an investment adviser renders substantially different types of investment advisory services to different clients, the investment adviser may provide them with different brochures, so long as each client receives all applicable information about services and fees. The brochure delivered to a client may omit any information required by Part 2A of Form ADV if the information is applicable only to a type of investment advisory service or fee which is not rendered or charged, or proposed to be rendered or charged, to that client or prospective client.

 (h)  Except as provided by paragraph (1), if the investment adviser is a sponsor of a wrap fee program, the brochure required to be delivered by subsection (b) to a client or prospective client of the wrap fee program shall be a wrap fee brochure containing all the information required by Form ADV. Any additional information in a wrap fee brochure shall be limited to information applicable to wrap fee programs that the investment adviser sponsors.

   (1)  The investment adviser does not have to offer or deliver a wrap fee brochure if another sponsor of the wrap fee program offers or delivers to the client or prospective client of the wrap fee program a wrap fee program brochure containing all the information specified in Part 2A Appendix 1 to Form ADV.

   (2)  A wrap fee brochure does not take the place of any brochure supplements that the investment adviser is required to deliver under this section.

 (i)  In accordance with Part 2 of Form ADV, the investment adviser shall amend its brochure and any brochure supplement and deliver the amendments to clients promptly when any information contained in the brochure or brochure supplement becomes materially inaccurate. The amendments shall be promptly filed with the Commission or with an investment adviser registration depository designated by the Commission.

 (j)  Delivering a brochure or supplement in compliance with this section does not relieve the investment adviser of any other disclosure obligations which the investment adviser may have to its clients or prospective clients under the act or this title.

 (k)  For the purposes of this section, the following terms have the following meanings:

   (1)  Client—A person to whom the investment adviser has given investment advice and for which the investment adviser has received compensation.

   (2)  Entering into—In reference to an investment advisory contract, the term does not include an extension or renewal without material change of the contract which is in effect immediately prior to the extension or renewal.

   (3)  Portfolio manager—The process of determining or recommending securities transactions for any portion of a client’s portfolio.

   (4)  Sponsor—An investment adviser that is compensated under a wrap fee program for administering, organizing or sponsoring the program, or for selecting or providing advice to clients regarding the selection of other investment advisers in the program.

   (5)  Wrap fee program—A program under which a client is charged a specified fee or fees not based directly on transactions in a client’s account for investment advisory services (which may include portfolio management or advice concerning the selection of other investment advisers) and execution of client transactions.

   The provisions of this §  404.011 issued under sections 404(a) and 609(a) of the Pennsylvania Securities Act of 1972 (70 P. S. § §  1-404(a) and 1-609(a)).

   The provisions of this §  404.011 adopted September 1, 2000, effective September 2, 2000, 30 Pa.B. 4551.

 (a)  Failure of an investment adviser to comply with the requirements of this section concerning cash payments for client solicitation constitutes a fraudulent, deceptive or manipulative act, practice or course of business, within the meaning of section 404 of the act (70 P. S. §  1-404).

 (b)  An investment adviser may not pay a cash fee, directly or indirectly, to a solicitor with respect to solicitation activities unless:

   (1)  The investment adviser is registered under the act.

   (2)  The solicitor, unless exempted, is registered under the act.

   (3)  The cash fee is paid pursuant to a written agreement to which the investment adviser is a party.

   (4)  The written agreement required by paragraph (3) shall:

     (i)   Describe the solicitation activities to be engaged in by the solicitor on behalf of the investment adviser and the compensation to be received therefor.

     (ii)   Contain 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 the act and the rules thereunder.

     (iii)   Require that the solicitor, at the time of any solicitation activities for which compensation is paid or to be paid by the investment adviser, provide the client with a current copy of the following:

       (A)   The investment adviser’s written disclosure statement required by §  404.011 (relating to investment adviser brochure disclosure).

       (B)   A separate written disclosure document which contains the following:

         (I)   The name of the solicitor.

         (II)   The name of the investment adviser.

         (III)   The nature of the relationship, including any affiliation, between the solicitor and the investment adviser.

         (IV)   A statement that the solicitor will be compensated for the solicitation services by the investment adviser.

         (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, for the cost of obtaining his account the client will be charged in addition to the advisory fee, and the differential, if any, among clients with respect to the amount or level of the advisory fees charged by the investment adviser if the differential is attributable to the existence of any arrangement pursuant to which the investment adviser has agreed to compensate the solicitor for soliciting clients for, or referring clients to, the investment adviser.

   (5)  The investment adviser receives from the client prior to, or at the time of, entering into any written or oral investment advisory contract with the client, a signed and dated acknowledgment of receipt of the investment adviser’s written disclosure statement required by §  404.011 and the solicitor’s written disclosure document required by paragraph (4)(iii)(B).

 (c)  For purposes of subsection (b)(4), this section does not apply to an investment adviser when the cash fee is paid to a solicitor as follows:

   (1)  With respect to solicitation activities for the provision of impersonal advisory services only.

   (2)  A solicitor who is one of the following:

     (i)   A partner, officer, director or employe of the investment adviser.

     (ii)   A partner, officer, director or employe of a person which controls, is controlled by, or is under common control with the investment adviser if the status of the solicitor as a partner, officer, director or employe of the investment adviser or other person, is disclosed to the client at the time of the solicitation or referral.

 (d)  Nothing in this section relieves a person of a fiduciary or other obligation to which the person may be subject under the law.

 (e)  For purposes of this section, the following terms have the following meanings:

   (1)  Client—Any prospective client.

   (2)  Impersonal advisory services—Investment advisory services provided solely by means of one of the following:

     (i)   Written materials or oral statements which do not purport to meet the objectives or needs of the specific client.

     (ii)   Statistical information containing no expressions of opinions as to the investment merits of particular securities.

     (iii)   Any combination of the foregoing services.

   (3)  Solicitor—A person or entity who, for compensation, directly or indirectly, solicits a client for, or refers a client to, an investment adviser.

   The provisions of this §  404.012 issued under sections 404(a) and 609(a) of the Pennsylvania Securities Act of 1972 (70 P. S. § §  1-404(a) and 1-609(a)).

   The provisions of this §  404.012 adopted September 1, 2000, effective September 2, 2000, 30 Pa.B. 4551.

 (a)  Failure of an investment adviser not registered as a broker dealer that has custody or possession of funds or securities in which any client has a beneficial interest to comply with the requirements of this section shall constitute a fraudulent, deceptive or manipulative act, practice or course of business, within the meaning of section 404 of the act (70 P. S. §  1-404).

 (b)  An investment adviser registered under section 301 of the act (70 P. S. §  1-301) that has custody or possession of funds or securities in which any client has any beneficial interest shall:

   (1)  Notify the Commission in writing that the investment adviser has or may have custody. The notification shall be given on Form ADV.

   (2)  Segregate the securities of each client marked to identify the particular client having the beneficial interest therein and held in safekeeping in some place reasonably free from risk of destruction or other loss.

   (3)  Deposit all client funds, in one or more bank accounts containing only clients funds.

   (4)  Maintain the accounts described in paragraph (3) in the name of the investment adviser as agent or trustee for the clients.

   (5)  Maintain a separate record for each account described in paragraph (3) showing the name and address of the bank where the account is maintained, the dates and amounts of deposits in and withdrawals from the account, and the exact amount of each client’s beneficial interest in the account.

   (6)  Immediately after accepting custody or possession of funds or securities from a client, notify the client in writing of the place where and the manner in which the funds and securities will be maintained and subsequently, if and when there is a change in the place where or the manner in which the funds or securities are maintained, the investment adviser gives written notice thereof to the client.

   (7)  At least once every 3 months, send each client or the client’s authorized representative as defined in this section an itemized statement showing the funds and securities in the investment adviser’s custody at the end of each period and all debits, credits and transactions in the client’s account during that period or have a reasonable basis for believing that a qualified custodian will send an itemized statement to each client or the client’s authorized representative during the same time interval containing substantially the same information.

   (8)  At least once every calendar year, engage an independent certified public accountant to verify all client funds and securities by actual examination at a time chosen by the accountant without prior notice to the investment adviser. A report stating that an accountant has made an examination of the client funds and securities, and describing the nature and extent of the examination, must be filed with the Commission within 30 days after each examination.

 (c)  When an independent certified public accountant makes an examination described in subsection (b)(8) and, upon examination, finds material discrepancies, the accountant shall notify the Commission within 1 business day of the finding by means of facsimile transmission or electronic mail, followed by first class mail, directed to the Commission’s Division of Licensing.

 (d)  For purposes of this section, a person will be deemed to have custody if the person directly or indirectly holds client funds or securities, has any authority to obtain possession of them, or has the ability to appropriate them.

 (e)  For the purpose of this section, the following terms have the following meanings:

   Authorized representative—The person specified in a written authorization which the client has signed and filed with the investment adviser or qualified custodian authorizing the investment adviser or qualified custodian to deliver the client’s account statements to that person.

   Qualified custodian—The following will be considered qualified custodians for purposes of this section:

     (i)   A bank as that term is defined in section 102(d) of the act (70 P. S. §  1-102(d)).

     (ii)   A Federally covered adviser as that term is defined in section 102(f.1) of the act.

     (iii)   A broker dealer registered with the Commission under section 301 of the act.

   The provisions of this §  404.013 issued under sections 404(a) and 609(a) of the Pennsylvania Securities Act of 1972 (70 P. S. § §  1-404(a) and 1-609(a)).

   The provisions of this §  404.013 adopted September 1, 2000, effective September 2, 2000, 30 Pa.B. 4551; amended April 15, 2005, effective April 16, 2005, 35 Pa.B. 2307. Immediately preceding text appears at serial pages (268865) to (268866).

   The provisions of this §  404.020 adopted March 29, 1974, effective March 30, 1974, 4 Pa.B. 582; amended January 17, 1992, effective January 18, 1992, 22 Pa.B. 294; reserved September 1, 2000, effective September 2, 2000, 30 Pa.B. 4551. Immediately preceding text appears at serial pages (252896) to (252897).