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Compliance for Investment Advisers

The Investment Adviser Examination Program

The Securities Division examination team, comprised of five field examiners, examines securities broker-dealers and investment advisers registered in the State of Washington and their branch offices located in the state. The examination team conducts routine examinations as well as examinations for cause. If your firm is to be examined, the examination team will generally contact you a few days prior to a tentative examination date and schedule a date and time. An examination for cause will occur unannounced and is conducted because the Securities Division has reason to believe that securities law violations may have occurred. Do not panic if an examiner shows up on your doorstep unannounced, however--it could be that the examiner finished an examination in your area early and has extra time available.

The examination may last a few hours to a few weeks, depending on the size and complexity of the adviser’s operations, and what the examiner finds. An examination usually begins with an entry interview with the principal(s) of the investment adviser. The examiners will want to know details about your operation and your personnel. If you don't make the offer, they will probably ask for a tour of your offices. They will request that you assign them a place where they can work. They are going to require a work surface such as a table in a relatively quiet place, a telephone, access to a copying machine and to your files and records. You should designate one person to act as the contact for the adviser--your compliance officer may be the best choice but the individual should be able to answer questions and know where to find things in your files.

During the examination, the examiner will review books and records to determine if the laws pertaining to investment advisers are being followed and to detect problems. Unfortunately, this is a job that is going to disrupt your business to some degree. By cooperating you can speed up the process so that you can more quickly get back to your normal routine. You must understand that the examiner has a legal right to look at every book or record in your office that is in any way related to your activities as an investment adviser. At the close of the examination the examiner will typically conduct an exit interview with you to outline the problems that have been found to date. The examiner may take copies of records back to the office for further analysis. When the examiner determines that an examination is completed, a deficiency letter, if warranted, will be drafted and sent to the adviser. The adviser is typically given 30 days to respond with solutions to the problems disclosed in the letter. It is the Division’s policy not to send letters if no deficiencies were found during the examination, since we found at least one enterprising adviser using such a letter as a marketing tool. For most examinations the adviser’s response to the deficiency letter will be sufficient and will close the examination. However, depending upon the severity of statute and rule violations found, remedies may be required ranging from a letter of caution to a consent order, a full cease and desist order, or, in the case of criminal violations of the Securities Act of Washington or federal statutes, a referral may be made to the appropriate prosecutor’s office.

Required Books and Records

Investment advisers have requested that an easily understood handout be provided that explains the types of books and records that are required. Regardless of the type of records, they have to be current, complete and factual. There are three categories of records that need to be maintained depending on the type of business you do. The following is a brief explanation of the three types:

The first category of records consists of those required of ALL advisers. The second category contains the supplementary records required if an adviser has custody of client assets. The final category includes the additional records required of advisers that manage client assets.

Records required of ALL advisers

Complaint file - every adviser should set up a complaint file, even if there have been no complaints. The complaint file should contain the original written or telephonic complaint and the adviser’s response to the complaint.

Journals - a record of receipts and disbursements entered as they occur. This forms the basis for entries into the Ledger. A journal is a very basic tool in any business and may be the easiest requirement to comply with.

Example: Sam Adams is the president and sole shareholder of Adams Financial Services, Inc., an investment adviser registered in this state. Sam's bookkeeper maintains a journal which clearly and accurately reflects all receipts and disbursements made by the corporation. The journal is broken down into months and within that breakdown it is subdivided by date. The journal for May 1998 is as follows:

May 1998: Journal Entries			Adams Financial Services, Inc.

Receipts			Disbursements
05/01/98	Jim Brown Retainer	$500	05/01/98	Rent	$1,200
05/14/98	Sally Lord Balance	1,000	05/01/98	Phone	475
05/15/98	Interest MMkt Acct	462	05/15/98	Secy Exp	890
05/18/98	Doug Brown Retainer	1,700
05/22/98	Bill Eps Balance	2,200
	Total:	$5,682		Total:	$2,565

In this example, the receipts and disbursements relate specifically to the advisory business of the corporation. If Sam also does commission receipt business, he would not be required to make a separate breakdown of the expenses.

General Ledger - and any auxiliary ledgers or other comparable records that reflect asset, liability, reserve, capital, income and expense accounts. The general ledger contains account sheets for each item on the balance sheet and income statement.

Trial balances, financial statements and other financial records, reflecting amounts included in the account balance of each ledger account in the general ledger.

Bank Records - checkbooks, statements, canceled checks, cash reconciliation--if you are a sole proprietorship and you use your personal checking account for your business transactions, we will examine your personal checkbook for the information we require. Bank statements should be reconciled on a monthly basis.

Bills and Statements - all the bills (paid and payable) the adviser receives that relate to the business.

Invoices - the bills you send to clients for services rendered.

Order Memoranda - terms and conditions of every securities order, any modification or cancellation; the person who recommended the transaction; person who placed the order; account for which entered; date; broker-dealer or bank that executes the order; designation of discretionary power, if used.

Written communications - all written communications (including those transmitted electronically) sent or received by the adviser relating to its business or involving correspondence with clients.

List of discretionary accounts - identify all clients for whom the adviser has discretionary power.

Powers - copies of all powers granted by clients to the adviser.

Written agreements - copy of every agreement the adviser has entered into.

Copies of ALL advertising - radio, TV, printed ads, letters; anything sent to ten or more persons. If you have a website, that is considered advertising as well, so you should document all changes made to the content of the site.

Personal transactions - ALL personal securities transactions of the principal(s) of the adviser and of persons who work for the adviser and give investment advice. These records must include: a description and amount of the security transaction; the date and nature of the transaction; the price at which it was effected; and the name of the broker, dealer or bank that effected the transaction. Personal securities transactions must be reported to the adviser not more than 10 days after the end of the calendar quarter in which the transaction was effected.

Records of disclosure statements and dates given to clients - complete consecutive record of disclosure documents or statements and a record of the dates they were provided to clients or prospects.

Backup information for performance claims - this information must be maintained if the adviser makes any claims regarding performance of client accounts.

Suitability - Customer information forms or other documents recording information used to determine suitability of recommendations for each client.

Supervision - Written supervisory procedures designed to prevent and detect violations, including how the procedures will be implemented.

Material nonpublic information - written policies and procedures reasonably designed to prevent the misuse of material nonpublic information.

Records required of investment advisers who have custody of client assets

Journal of all securities transactions and movements - this must be a contemporaneous, chronological record of all purchases, sales, receipts and deliveries of securities and all other credit and debits to such accounts for all clients combined. Must contain records of transactions, securities movements, and debits and credits.

Separate ledger for each client - this is similar to the above record but is for each client separately. It records transactions, securities movements, and debits and credits.

Copies of confirmations - copies of confirmations of securities transactions placed by the adviser on behalf of its clients. Usually, these are received from the broker-dealer executing the transaction.

Record by security showing each client's interest and the location thereof - this shows the client's interest in securities in adviser's custody or possession.

Records required of advisers that manage client assets

Record for each client of purchases and sales - this should contain a history of every securities transaction by client.

Record showing each client's positions - this shows the current position in the security for each client.

Due diligence file - we highly recommend establishing a due diligence file containing documentation explaining why transactions were executed in client accounts. A due diligence file can be extremely helpful to justify transactions that have declined in value and when a client asks why that trade was even made.

Retention Period

All of the above records are required to be maintained by the adviser in an easily accessible place for a period of three years (our office recommends five years) from the end of the fiscal year during which the last entry was made on the record, and for the first two years the record must be maintained in the adviser's principal office. We have not defined what “easily accessible place” means, but our policy is that if you can provide the document to us within 24 hours of requesting, that is sufficient access. Articles of incorporation, partnership articles, minute books, stock certificate books and the like must be maintained in the adviser's principal office and must be preserved for at least three years after the termination of the enterprise.

Storage Medium

The required records may be maintained on paper, film or electronic media (tape, diskette, CD, etc.) but the record must be capable of being made immediately available to an examiner upon request. Film or electronic files should be duplicated and the copy stored separately from the basic record (and preferably offsite, for disaster recovery reasons).

Common Compliance Problems

Some of the problems the team uncovers during our examination relate to the operation of the firm. Examples of operations problems include incomplete recordkeeping, outdated Form ADV, insufficient net capital base, inadequate supervisory procedures, and outdated or incorrect account information. Responsibility for investment adviser regulation is now divided between state and federal authorities. Our examiners will review the investment adviser’s operations to determine whether the investment adviser is properly registered at the state level or whether the adviser should instead be registered with the Securities and Exchange Commission (SEC). Generally, this depends on the value of the assets the investment adviser has under active management.

The examination also uncovers sales practice problems such as misrepresentation to clients, inflated performance claims, suitability of investments offered to clients, inadvertent custody of client funds and securities, and engaging in investment adviser related activities without being licensed. These types of conduct result in increased compensation to the adviser and diminished protection for the client.

These materials cover the most common problems the examination team finds in its examinations of investment advisers:

· Disclosure Problems

· Conflicts of Interest

· Misleading Advertisement and Performance Claims

· Custody

· Suitability

· Salesperson Registration

· Inadequate Internal Control and Supervisory Procedures

· Insufficient Net Capital

DISCLOSURE PROBLEMS

Securities Division examiners frequently find inadequate disclosure to investment advisory clients on the following topics: what investment advisory services are being provided, who is providing those services, what is the client being charged for the services, and what conflicts of interest might be involved for the investment adviser.

What services are being provided and who is providing them are questions that often arise where the investment adviser only introduces the clients to one or more other advisers who will actually provide the investment advice to the client. These questions also arise in connection with wrap fee programs, where some services may be provided by someone other than the investment adviser. The investment advisory agreement should answer these questions, as should the investment adviser’s brochure (Part II of Form ADV). You must have a written agreement with each client, even if you are a fee only financial planner. This contract must disclose: the services to be provided, the term of the contract, the advisory fee, the formula for computing the fee, the amount of prepaid fee to be returned in the event of contract termination or nonperformance, whether the contract grants discretionary power to the adviser, and that the contract will not be assigned by the investment adviser without the consent of the client. You are not allowed to include a performance fee arrangement unless it complies with the provisions of Section 205-3 of the Investment Advisers Act of 1940. The contract may not include a so-called “hold harmless” or “hedge” clause, which purports to require clients to waive potential claims they may be entitled to bring under state or federal statutes, or which seeks to hold the investment adviser to a lesser standard of care than is required by statute. You are allowed to include an arbitration clause in the contract. Securities Division examiners will review your investment advisory contract and compare the contract with the activity the examiner observes at the examination site and with the contents of Form ADV. The examiner will compare fees listed in client agreements against the fee schedule set forth in the Form ADV. The Form ADV should disclose that fees are negotiable, if in fact they are.

The examiner will check to see if your Form ADV is current and that you are properly providing it to your clients. You are required to update Form ADV (and file the amendment with the Securities Division) whenever information disclosed in the form changes in any material respect. If you are furnishing a brochure to clients, that should be updated at the same time the Form ADV is updated. Part II of Form ADV or the brochure must be furnished to prospective clients 48 hours before they sign a contract, or at the time of signing the contract if the client can cancel without penalty within five days after signing. In addition, every year you must deliver to each client, or offer to deliver, a copy of the updated disclosure. You need to keep records of to whom the disclosure was offered or sent, and which clients requested the update.

CONFLICTS OF INTEREST

Securities Division examiners look for conflicts of interest when they examination investment advisers, and check to see if investment advisory clients are being given adequate disclosure of any conflicts of interest. Different kinds of conflicts of interest arise depending on the number of roles the investment adviser and its affiliates play with regard to the customer. The investment adviser is a fiduciary who must put the customer’s interest before his own. These are some of the situations involving conflicts of interest an examiner looks for:

· conflicts where the investment adviser is also the broker-dealer or the broker-dealer is an affiliate of the investment adviser

· conflicts where the investment adviser or its representative has an ownership interest (or especially a controlling interest) in an issuer whose securities the adviser or representative recommends to customers

· conflicts relating to the payment of finder’s fees

· conflicts between the investment adviser’s interest in trading for the investment adviser’s account and the interests of customers

· conflicts relating to the receipt of undisclosed “soft dollar” arrangements

In all conflicts situations the key issue is the effect of the conflict on the customer. Has the customer been told of the conflict? Has the customer consented to the transaction despite the disclosed conflict? If the customer consented, was the customer in a position to evaluate the effect of the conflict on the customer’s interest? The more vulnerable the customer the greater the burden on the investment adviser to show that the customer has knowingly consented to the conflict. Disclosure and customer consent may not always be sufficient remedies for conflicts of interest.

Examiners will review any written policy of the investment adviser on conflicts of interest and will consider conflicts issues throughout the review of books and records during the examination. An examiner might spot a conflict through review of correspondence with customers, customer complaints, or through the statements of account of customers and of the investment adviser itself and of its employees. Once an examiner has spotted a conflict, the examiner will generally ask the principals of the investment adviser for an explanation. The examiner will then seek further evidence to confirm the representations of the investment adviser.

Conflicts of interest may involve serious securities law violations, such as sale of unregistered securities, fraud in connection with the purchase or sale of securities, and unlawful acts of a person advising another. Some of the most serious conflicts problems arise when the investment adviser is also an issuer or is an affiliate of an issuer. If there is an apparent conflict of interest, the investment adviser has a greater burden of showing that the investment recommendation was suitable for the customer.

The examiner will also check to see whether the adviser has established, and is maintaining and enforcing written policies and procedures reasonably designed to prevent the misuse of material nonpublic information, as required by WAC 460-24A-220(17) and Section 204A of the Investment Advisers Act of 1940.

MISLEADING ADVERTISEMENT AND PERFORMANCE CLAIMS

The examiner will review the investment adviser’s advertising files containing a copy of all advertisements (pamphlets, circulars, solicitation letters, etc.) the adviser uses to solicit new business and maintain current clients. All advertisements should be dated and initialed by a principal (or designated supervisor) of the adviser prior to or immediately after distribution to ensure that the advertisement falls within applicable guidelines.

Common problems the examination uncovers include:

· The use of testimonials by clients or other individuals, which are not allowed.

· “Puffing” or exaggerating the services and performances available from the adviser, or the education and professional background of the adviser and designations held.

In the area of performance and performance advertising problems include:

· Money mangers using simulated performance figures instead of real time data.

· Annualized rate of return. Rates of return should be shown only for the period being actually measured, i.e., rates should not be annualized. In other words, if the return being shown is for three months, then it should not be multiplied by four and an annual rate shown, since there is no assurance that the rate of return will be sustained for a 12 month period.

· Rate of return incorrectly calculated. Rates of return should be disclosed net of all fees. Also, the Division has come across several instances where advisers did not have adequate knowledge of the software they were using to calculate rates of return and therefore made errors.

· Inconsistent methods of calculating performance. The method of calculating performance (e.g., AIMR time-weighted rate of return) should be consistent from period to period. Methods should not be switched to whatever method shows the largest gain for a particular time period. While there is no prescribed method of calculating performance (i.e., the use of AIMR standards is not mandated by statute), if an adviser says it is AIMR compliant, the adviser should be able to demonstrate compliance with the standards, and our examiner will verify such claims using third party software.

· Use of indices which makes the adviser appear superior to its competitors and inaccurate comparisons to indices. If comparisons are going to be made to indices, then: (1) the securities making up the particular index should be of like kind to the adviser’s portfolio, i.e., you do not compare an equity portfolio to a bond fund; (2) rates of return must be shown net of fees; and (3) comparisons to the S&P 500 and Dow Jones may be misleading because those indices do not factor in reinvested dividends.

· Failure to include disclaimers. A disclaimer to the effect that past performance is no guarantee of future performance needs to be included.

· Creating distorted performance results by constructing composites that include only selected profitable accounts, or are for selected profitable periods.

During the review of advertisement files, the examiner may examine software and other programming the adviser uses to record and retain client data and the examiner may verify performance claims using third party software.

For further information on showing performance and performance advertising, please see the Division’s Securities Act Interpretive Statement –21, and the SEC's Clover Capital Management, Inc. no-action letter of October 28, 1986 (copy available upon request). In general, because the Division has found so many problems in this area, the Division strongly discourages advisers from attempting to provide overall portfolio numbers and comparing them to indices.

In addition, the examiner will review business cards and letterhead to determine whether they may be misleading. There is some confusion about who can use the term “Registered Investment Adviser”. If, on Form ADV Part I, No. 8, the box for “A. Corporation”, “B. Partnership”, or “D. Other” has been checked, then an entity is the registered investment adviser, and persons employed by the entity and providing investment advice must refer to themselves as “investment adviser representatives”. The initials “RIA” cannot be used after a person’s name. The SEC has determined that use of such initials may be misleading since it implies that a professional designation has been earned. Nor can anyone call himself or herself a “registered principal” of an investment adviser, since that is not a position designated in the Securities Act as requiring a license. The term “investment counsel” cannot be used by an adviser unless a substantial portion of its business consists of providing “investment supervisory services” as that term is defined by the SEC. If the adviser has other lines of business, such as being a registered representative of a securities broker-dealer and a licensed insurance agent, and operates under a DBA, then care must be taken on the disclosure on business cards and letterhead given to clients and prospective adviser clients; e.g., a letter sent to an advisory client dealing with advisory matters should not go out on insurance company letterhead.

CUSTODY PROBLEMS

Definition of custody

The term “custody” is not defined in the Securities Act of Washington or the Investment Advisers Act of 1940. However, court cases involving custody, interpretations and no-action letters have established fairly broad parameters and deem an adviser to have “custody” of client assets if it has any direct or indirect access to them. For example, an adviser has custody if it: has a general power of attorney over a client’s account; has signatory power over a client’s checking account; maintains an omnibus-type account in its own name at a broker-dealer or bank in which client securities are maintained after trades settle; or serves as a trustee of client trusts.

An investment adviser may also be deemed to have custody of client funds if it sends the bills for its services directly to the custodian who then automatically pays the adviser. No-action letters issued by the SEC have allowed automatic payment of advisory fees where:

· The client authorizes the arrangement in writing;

· The adviser sends the bill to both the client and the custodian at the same time;

· The bill shows the amount of the fee, how it was calculated and the value of the assets on which the bill is based; and

· The custodian notifies the client at least quarterly of how much has been paid to the adviser.

Investment advisers who are issuers of securities

An adviser who is also an issuer (or an affiliate of an issuer, such as being the general partner of a limited partnership) of securities is deemed to have custody unless an independent custodian is utilized and the custodial agreement(s) include provisions that define the method by which the adviser receives payment and withdraws funds (via an independent representative). The Division generally requires compliance with the SEC’s PIMS, Inc. no-action letter of October 21, 1991 (copy available upon request). Advisers who are setting up so-called “hedge funds” or other pooled investment funds are often unaware that they have to comply with this requirement.

Requirements for advisers with “custody”

Additional books, records and financial requirements are imposed on advisers that have custody or possession of client securities or funds, which include:

· Advisers must meet a net capital requirement of $35,000;

· Separate ledger accounts for each client showing purchases, sales, receipts and deliveries;

· A record of each security in which any client has a position, which shows the name of client having any interest, the amount of interest of each client and the location of each security.

In addition, WAC 460-24A-105(5) requires that advisers with custody have an annual unannounced audit by an independent certified public accountant.

Examination procedure for investment advisers with custody

In addition to an examination of all the books and records required of advisers (WAC 460-24A-200) including those listed above, additional tasks of the examination staff may include:

· Determining whether the adviser has any affiliation with the custodian; and

· Obtaining information regarding how instructions are conveyed to a custodian, who determines where the client funds or securities are maintained, and, if the custodian is a person other than a broker-dealer (such as a bank) how the transactions are settled.

SUITABILITY

Examiners find suitability problems by comparing customer new account information with the services to be provided under the investment advisory agreement and with the advice given to the customer. Before recommending or executing an investment transaction on behalf of a client, you must have reasonable grounds for believing the investment transaction is suitable for the client. You are required to make reasonable efforts to obtain information concerning the client’s financial status, tax status, investment objectives, and other information considered to be reasonably needed. For an investment adviser, merely asking for estimated net worth and income, and checking a box for investment objective probably is not sufficient to establish suitability, particularly if you had to establish it in an arbitration or court action. A better practice is to obtain detailed information such as a client’s: assets, liabilities, income and expenses; existing investments, financial goals and risk tolerance; marital status, dependents, family obligations, age, health, and mortality issues; and insurance coverage. You may need to obtain documents such as tax returns, company benefit (e.g., 401(k)) booklets, will and trust documents, and stock option agreements. Since suitability will change over time as a client’s family and financial circumstances change, you need to update this information periodically. The best practice is to update this information annually, and the Division considers three year old information to be stale.

The examiner will look carefully at suitability of recommendations where the investment adviser has discretion over the customer’s account. However, the suitability of investment recommendations is an issue relating to all investment advisory customers, not only those who have given the investment adviser discretion over his or her account.

In addition, the examiner will look to see whether you are performing, and documenting, due diligence in evaluating the investment products you recommend to clients. If a client insists on purchasing or retaining an investment that you do not believe is suitable for the client, document that fact in the client file.

SALESPERSON REGISTRATION

During an examination, the examiner often uncovers employees who should be registered as an investment adviser representatives but have not done so. This lack of registration usually occurs because the investment adviser was unaware of the registration requirements of the State of Washington.

Advisers should also register employees who:

· Use terms such as investment counselor, financial planner, financial consultant, money manager, investment manager, investment planner or uses a designation such as CFP or ChFC to identify themselves.

· Receive a fee from a registered investment adviser such as a money manager when the employee refers a prospective client to the adviser and receives a fee for that referral.

· Prepare a financial plan for a client and receive a fee.

INADEQUATE INTERNAL CONTROL AND SUPERVISORY PROCEDURES

A primary responsibility of an investment adviser is the supervision of its employees, to ensure that all of its activities comply with disclosures made to clients and with the provisions of applicable securities laws. Failure to reasonably supervise can be grounds for suspension or revocation of registration under RCW 21.20.110(1)(j). The most effective way to fulfill this responsibility is to construct and implement a comprehensive system of internal controls and supervisory procedures. Particular attention should be given to controls in those areas of an adviser's activities that pose the greatest potential for creating conflicts of interest or other results that can harm clients. Examiners will evaluate advisers' internal controls and supervisory procedures. The following examples illustrate weaknesses in internal controls found during examinations:

· An investment adviser's operating procedures allow a portfolio manager to value the securities recommended, or override values provided by a custodian, for purposes of reporting to clients and calculating advisory fees without any independent review. A strong control environment would provide for a separation of duties and proper management oversight of pricing overrides.

· An investment adviser establishes comprehensive written control procedures, but does not properly monitor its business activities for compliance with these procedures. For example, an adviser's insider trading policy states that access persons may not trade shares issued by companies on a "restricted list," yet the adviser does not review personal securities transactions to ensure that inappropriate transactions did not take place.

· An investment adviser does not have an oversight process, other than that performed by the portfolio manager responsible for managing an account, to determine whether risks taken in managing client portfolios are consistent with each client's stated investment objectives and/or to measure and evaluate each client's risk tolerance.

(this section is derived substantially from the 5/1/2000 SEC OCIE letter to federally registered advisers)

INSUFFICIENT NET CAPITAL

You are required to maintain financial records for the business, such as journals for cash receipts and disbursements, and ledgers reflecting asset, liability, reserve, capital, income and expense accounts. These should be kept in such a manner that you can produce financial statements on a timely basis in accordance with generally accepted accounting principles (i.e., on an accrual basis). The software program “Quickbooks” is generally sufficient to generate these statements. The examiners will also want to review your check register, so sole proprietors may want to set up a separate business checking account so that business income and expenses are segregated from personal (the examiners may still request to see a sole proprietor’s personal account, however). Paid bills and bills payable will also be reviewed to get an indication of the adviser’s overall financial solvency. Advisers in serious financial condition are cause for a much more detailed examination, as they may have an incentive to churn customer accounts, engage in risky trading strategies, or be tempted to divert client funds in order to stay in business.

If you have custody of, or discretion over, client funds or securities, then you will need to maintain minimum net capital (or have a surety bond in an equivalent amount), which is $35,000 for custody and $10,000 for discretion. You have discretion even if all you can do is trade among a family of mutual funds. Net capital must be maintained at all times, not just at quarter or year end. Since the net capital calculation requires subtracting physical and intangible assets from net worth, sole proprietors often are not able to meet the net capital requirement because many persons’ principal assets are their home, furnishings, and automobiles. The alternatives for sole proprietors, then, are either to incorporate and capitalize the company with enough financial assets to meet the net capital requirement, or else to obtain a surety bond. If needed, a surety bond form can be obtained from the Division, and it is also available on the Division’s website.

Ethical Conduct/Fiduciary Responsibilities

The law requires that you deal fairly and honestly with every client. The first rule in the advisory business is, “An Investment Adviser is a FIDUCIARY and has a duty to act for the benefit of its clients.” If you always follow that guideline it will be difficult for you to stray outside the intent of the law. Some of the specific requirements in the Securities Act are that an adviser or adviser representative shall not engage in dishonest or unethical practices including, although not limited to, the following:

Recommending to a client to whom investment supervisory, management or consulting services are provided the purchase, sale or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the client on the basis of information furnished by the client after reasonable inquiry concerning the client's investment objectives, financial situation and needs, and any other information known by the adviser or adviser representative.

Exercising any discretionary power in placing an order for the purchase or sale of securities for a client without obtaining written discretionary authority from the client within ten (10) business days after the date of the first transaction placed pursuant to oral discretionary authority, unless the discretionary power relates solely to the price at which, or the time when, an order involving a definite amount of a specified security shall be executed, or both.

Inducing trading in a client's account that is excessive in size or frequency in view of the financial resources, investment objectives and character of the account in light of the fact that an adviser in such situations can directly benefit from the number of securities transactions effected in a client’s account. The rule appropriately forbids an excessive number of transaction orders to be induced by an adviser for a customer’s account.

Placing an order to purchase or sell a security for the account of a client without authority to do so.

Placing an order to purchase or sell a security for the account of a client upon instruction of a third party without first having obtained a written third-party trading authorization from the client.

Borrowing money or securities from a client unless the client is a broker-dealer, an affiliate of the adviser or adviser representative, or a financial institution engaged in the business of loaning funds.

Loaning money to a client unless the adviser is a financial institution engaged in the business of loaning funds or the client is an affiliate of the adviser or adviser representative.

Misrepresenting to any advisory client, or prospective advisory client, the qualifications of the adviser or any employees of the adviser, misrepresenting the nature of the advisory services being offered or fees to be charged for such service, or omitting to state a material fact necessary to make the statements made regarding qualifications, services or fees, in light of the circumstances under which they are made, not misleading.

Providing a report or recommendation to any advisory client prepared by someone other than the adviser without disclosing that fact. (This prohibition does not apply to a situation where the adviser uses published research reports or statistical analyses to render advice or where an adviser orders such a report in the normal course of providing service.)

CHARGING A CLIENT AN UNREASONABLE ADVISORY FEE

Failing to disclose to clients in writing before any advice is rendered any material conflict of interest relating to the adviser or any of its employees which could reasonably be expected to impair the rendering of unbiased and objective advice including:

· Compensation arrangements connected with advisory services to clients which are in addition to compensation from such clients for such services; and

· Charging a client an advisory fee for rendering advice when a commission for executing securities transactions pursuant to such advice will be received by the adviser or its employees.

Guaranteeing a client that a specific result will be achieved (gain or no loss) with advice which will be rendered.

Publishing, circulating or distributing any advertisement which does not comply with WAC 460-24A-100.

Disclosing the identity, affairs, or investments of any client unless required by law to do so, or unless consented to by the client.

Taking any action, directly or indirectly, with respect to those securities or funds in which any client has any beneficial interest, where the adviser has custody or possession of such securities or funds when the adviser's action is subject to and does not comply with the requirements of WAC 460-24A-105.

Entering into, extending or renewing any investment advisory contract unless such contract is in writing and discloses, in substance, the services to be provided, the term of the contract, the advisory fee or the formula for computing the fee, the amount of prepaid fee to be returned in the event of contract termination or nonperformance, whether the contract grants discretionary power to the investment adviser or investment adviser representative and that no assignment of such contract shall be made by the investment adviser without the consent of the other party to the contract.

The conduct set forth above is not inclusive. Engaging in other conduct such as non-disclosure, incomplete disclosure, or deceptive practices shall be deemed an unethical business practice. Additionally, you may only conduct agency cross transactions or charge performance based fees if you comply with the special rules regarding such transactions and fees, you must use a contract that is in writing and complies with the content requirements of the rules and does not attempt to subvert the interests of the client. Further, you must comply with the “Brochure Rule” regarding information about the adviser that must be provided to your clients.

As an investment adviser you are a fiduciary with an affirmative duty to act in good faith toward your clients and to fully and fairly disclose all material facts to them in your dealings with them. This duty necessitates that regulations be in place to protect the public and that regulators police the profession well. Always remember to put the client and his or her needs first to demonstrate that you accept the responsibility demanded of you and that you understand the duty with which you have been entrusted.