Investment Adviser Contracts

ByHugo Mayer

Office of the Kansas Securities Commissioner

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.

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. Firm’s are more willing to adopt changes while in the registration process.

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)

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

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.

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.

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.

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 Solicitor’s Disclosure Statement.

• Proxy Voting- who has the authority for voting proxies.

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.

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.

NEMO Tools

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