Investment Adviser Contracts

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Investment Adviser Contracts

• By
• Hugo Mayer
• Office of the Kansas Securities Commissioner

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IA Contracts

• For purposes of training, we will cover the
  requirements governing IA contracts under NASAA
  Model Rules. We will also cover other standard
  contractual provisions commonly associated with
  IA contracts. You are reminded as always to
  refer to your individual state requirements
  governing investment adviser contracts when
  conducting examinations in your home state.

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IA Contracts

• The IA contract should be reviewed for its
  readability and use of plain English. Your
  respective agency may not have specific rules
  addressing the content of a contract, but nothing
  prevents you from suggesting or negotiating
  changes to a contract. Firms are more willing
  to adopt changes while in the registration
  process.

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NASAA Model Rule 502(c)Requirements

• Services to be provided (financial planning,
  consulting, investment advisory, asset
  management)
• The term of the contract (limited versus ongoing)
• The investment advisory fee (set-up and
  termination charges, hourly, fixed and annual
  fees)

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NASAA Model Rule 502(c)Requirements (continued)

• 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.
• Extent of discretion being granted to the IA.
• No direct or indirect assignment or transfer of
  the contract can be made without the consent of
  the client

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NASAA Model Rule 502(c)Requirements (continued)

• Shall not be compensated on the basis of a share
  in capital gains or capital appreciation.
  (exception for performance based fees)
• Must notify client in change in membership or
  partnership involving the IA.
• Prohibit any condition, stipulation, or
  provisions binding any person to waive compliance
  with any provision of this act.

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Other Standard Contract Provisions

• Arbitration contracts cannot contain
  unreasonable arbitration clauses.
• Termination of Advisory Relationship a client
  should have the right to terminate a an advisory
  relationship without penalty at any time. (48
  hour/5 day provision) This does not prevent
  charging reasonable start-up or termination fees.
  

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Other Standard Contract Provisions

• Suitability, Investment Guidelines and
  Restrictions client information, investment
  policy statement, restricted investments.
• Brokerage Practices directed brokerage, soft
  dollars, best execution, principal transactions.

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Other Standard Contract Provisions

• Sub-Advisors periodically monitors and suggests
  re-allocation of assets, or hires and fires
  sub-advisor.
• Solicitors must disclose that referral fees
  were paid and any impact on client fees. Maybe
  addressed in a separate written Solicitors
  Disclosure Statement.
• Proxy Voting- who has the authority for voting
  proxies.

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Other Standard Contract Provisions

• Communications the procedures for transmitting
  notices and communications.
• Confidentially to what extent is it addressed.
• Non-Exclusivity for Services manages assets for
  other clients and may manage them differently.

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Other Standard Contract Provisions

• Hedge Clauses nothing in the contract should be
  construed as a waiver or limitation of any rights
  that a client may have under applicable state or
  federal law.
• Governing Law indicate that state law shall
  apply to the extent not inconsistent with
  applicable federal law.

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NEMO Tools

• IA Exam Module there is a section in the module
  that addresses most of the pertinent matters
  related to investment adviser contracts.