Series 66

Client Communication and Compensation Issues - Investment Advisor Contracts

While state laws require that contracts between state registered IAs and clients be in writing, the Investment Advisers Act of 1940 does not.


Exam Tips and Tricks
Although the NASAA Model Rule on Unethical Business Practices does state that written contracts are required, the questions on the exam do reference oral contracts.



However, most IAs put their contracts in writing to avoid misunderstandings. Also, SEC rules do impose the following conditions on a written investment advisory contract:


  • Performance-based fees are generally prohibited (learn more in the next section).
  • Contract language must not lead clients to believe they have waived rights to take legal action against the advisor.
  • There must be no provisions that force the client to waive compliance with any of the rights or rules within the Investment Advisers Act of 1940.
  • Contract must prohibit the IA from assigning the contract without the client's consent.
Under the USA, IA contracts must:

  • disclose all material information regarding the services to be provided and the fees to be charged.
  • disclose conditions under which the contract may be assigned to another party.
  • require client consent prior to the IA assigning the contract.
  • require the IA (if a partnership) to notify the client of any change in the membership of the partnership.
  • not permit the IA to be compensated on the basis of sharing in capital gains or capital appreciation of the client's accounts (however, fees based on the total value of the account, such as an assets under management fee, are allowed).
Performance Guarantees
Performance guarantees are generally considered a conflict of interest. The hallmark of an investment advisor is objectivity, so there must be no personal interest in the outcome of any specific investment recommendation. Also, guaranteeing a client's account against loss is specifically cited as an unethical business practice under the USA.


Look Out!
Guaranteeing a client\'s account against loss is a type of performance guarantee. The Series 66 exam is not likely to test you on any distinction between these two concepts.


If any change within a partnership firm is made (i.e. change in partners), clients must be made aware of the change in reasonable time. It is important to note that this act of notification only applies to partnerships, not corporations.



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