Securities Lawyer's Deskbook                          published by The University of Cincinnati College of Law

Rule 206(4)-4 -- Financial and Disciplinary Information that Investment Advisers Must Disclose to Clients

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1. It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of section 206(4) of the Act for any investment adviser registered or required to be registered under section 203 of the Act to fail to disclose to any client or prospective client all material facts with respect to:
   
   
   1. A financial condition of the adviser that is reasonably likely to impair the ability of the adviser to meet contractual commitments to clients, if the adviser has discretionary authority (express or implied) or custody over such client's funds or securities, or requires prepayment of advisory fees of more than $ 500 from such client, 6 months or more in advance; or
      
      
   2. A legal or disciplinary event that is material to an evaluation of the adviser'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 adviser or a management person of the adviser (any of the foregoing being referred to hereafter as "person") that were not resolved in the person's favor or subsequently reversed, suspended, or vacated are material within the meaning of paragraph (a)(2) of the rule for a period of 10 years from the time of the event:
   
   
   1. A criminal or civil action in a court of competent jurisdiction in which the person --
      
      
      1. Was convicted, pleaded guilty or nolo contendere ("no contest") to a felony or misdemeanor, or is the named subject of a pending criminal proceeding (any of the foregoing referred to hereafter 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;
         
         
      2. Was found to have been involved in a violation of an investment-related statute or regulation; or
         
         
      3. 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.
         
         
   2. Administrative proceedings before the Securities and Exchange Commission, and other federal regulatory agency or any state agency (any of the foregoing being referred to hereafter as "agency") in which the person --
      
      
      1. Was found to have caused an investment-related business to lose its authorization to do business; or
         
         
      2. 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.
         
         
   3. Self-Regulatory Organization (SRO) proceedings in which the person --
      
      
      1. Was found to have caused an investment-related business to lose its authorization to do business; or
         
         
      2. Was found to have been involved in a violation of the SRO's rules and was the subject of an order by the SRO barring or suspending the person from membership or from association with other members, or expelling the person from membership; fining the person more than $ 2,500; or otherwise significantly limiting the person's investment-related activities.
         
         
3. The information required to be disclosed by paragraph (a) of this section shall be disclosed to clients promptly, and to prospective clients not less than 48 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:
   
   
   1. 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.
      
      
   2. Found means determined or ascertained by adjudication or consent in a final SRO proceeding, administrative proceeding, or court action.
      
      
   3. Investment-related means pertaining to securities commodities, banking, insurance, or real estate (including, but not limited to, action 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. 1 et seq.), or fiduciary).
      
      
   4. Involved means acting or aiding, abetting, causing, counseling, commanding, inducing, conspiring with or failing reasonably to supervise another in doing an act.
      
      
   5. Self-Regulatory Organization or SRO means any national securities or commodities exchange, registered association, or registered clearing agency.
      
      
5. For purposes of calculating the 10-year period during which events are presumed to be material under paragraph (b), 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 (b) of this rule shall not relieve any investment adviser from the disclosure obligations of paragraph (a) of the rule; compliance with paragraph (a) of the rule shall not relieve any investment adviser from any other disclosure requirement under the Act, the rules and regulations thereunder, or under any other federal or state law.
   
   

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   NOTE: Registered investment advisers may disclose this information to clients and pospective clients in their "brochure," the written disclosure statement to clients under Rule 204-3; Provided, That the delivery of the brochure satisfies the timing of disclosure requirements described in paragraph (c) of this rule.
   

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