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Investment Adviser Guide

Contracts

Each investment adviser should create its own client contract which addresses the business needs of the adviser. The Division of Securities does not have a standard contract because of the variety of services and requirements among advisers. However, § DFI-Sec 5.05(2), Wis. Adm. Code, sets out requirements for investment advisory contracts. Perhaps the most significant is the requirement in § DFI-Sec 5.05(8), Wis. Adm. Code, that all contracts be in writing. The Investment Advisers Act of 1940 is silent on the form of a contract, allowing it to be either oral or written. However, all contracts with Wisconsin customers must be in writing. The written contract requirement applies to all types of advisers, including fee-only planners or those providing services on demand. The Code sets forth other requirements for all contracts:

The terms of the advisory agreement must set forth what services the adviser will provide under the contract and may itemize specific services that are or are not included as part of the advisory relationship.

The fee schedule applicable to the account must be clearly set forth, including how the fee is calculated, how and when it is collected, and the formula for determining the amount of prepaid fees to be returned upon early termination of the contract. Asset-based advisory fees cannot be calculated on portfolio performance except for certain types of accounts. Fixed fees must at least specify the hourly or other rate used in the fee calculation and the amount of time estimated for the project so the client can understand how the fee was determined. Fees cannot be based on assets that are not managed by the adviser.

A provision that the contract cannot be assigned to another adviser without the written consent of the client must be included.

If discretionary or trading authority is being granted to the adviser, the extent of such authority must be detailed.

The client cannot be required to waive any rights under Wisconsin Statutes or rules. The contract cannot require the application of a law other than the law of the state of residence of the client nor can an arbitration clause require the hearing to be conducted in a location that is disadvantageous to the client to the extent it would discourage the client to pursue arbitration. The adviser cannot include language that requires clients to indemnify the adviser for losses or hold the adviser totally harmless for losses based on the actions of the adviser, whether committed in good faith or not—such clauses cannot absolve the adviser from actions under federal or state securities laws that provide clients with civil liability rights.

In a situation where a husband and wife have jointly entered into an agreement with an investment adviser and have joint and individual (including custodial) accounts under management, separate contracts will not be required but both the husband and wife must sign the joint agreement.

Advisers must provide the client with a copy of all contracts within 20 days of signing ( § DFI-Sec 5.05(5), Wis. Adm. Code).