1. It is unlawful for any person who receives, directly or indirectly, any consideration from another person for advising the other person as to the value of securities or their purchase or sale, whether through the issuance of analyses or reports or otherwise: a. To employ any device, scheme, or artifice to defraud the other person; or b. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon the other person. 2. It is unlawful for any person, in the solicitation of a client for investment advisory services, to make any false or misleading statement of material fact, or to fail to disclose a material fact. 3. It is unlawful for any person who provides investment advisory services subject to the provisions of this chapter to knowingly sell any security to or purchase any security from a client while acting for the person's own account or as a broker for another client unless the person first makes a written disclosure to the client of the capacity in which the person is acting and obtains the client's written consent to the transaction. 4. It is unlawful for any person who provides investment advisory services subject to the provisions of this chapter to engage in dishonest or unethical practices as the commissioner may define by rule. 5. It is unlawful for any investment adviser to enter, extend, or renew any investment advisory contract unless the investment advisory contract provides in writing that: a. The investment adviser may not be compensated on the basis of a share of capital gains, earnings, or capital appreciation of the funds or any portion of the funds of the client. This subdivision does not prohibit an investment advisory contract that provides for compensation based on the total value of a fund determined as of a definite date or averaged as of definite dates or over a definite period. This subdivision does not prohibit an investment advisory contract that provides for performance fees permitted and determined in accordance with section 205 of the Investment Advisers Act of 1940 [Pub. L. 768; 54 Stat. 852; 15 U.S.C. 80b-5] and the rules adopted thereunder. b. An assignment of the investment advisory contract may not be made by the investment adviser unless the investment adviser notifies the client of the intended assignment and obtains the prior written consent of the client. c. The investment adviser shall provide written notice to the client within fifteen days of any change of ownership in excess of five percent. d. The investment adviser shall provide written notice to the client within fifteen days of a change of controlling interest of the investment adviser. The client may terminate the investment advisory contract without penalty by providing a written notice to the investment adviser within thirty days after the client's receipt of the notice of change of controlling interest. 6. Client securities or funds must be maintained by a qualified custodian. It is unlawful for any investment adviser to take or have custody of any securities or funds of any client unless the investment adviser acts as a fiduciary pursuant to duties as an executor, guardian, conservator, receiver, or trustee. 7. "Custody" means holding directly or indirectly, client funds or securities, or having any authority to obtain possession or having the ability to appropriate funds or securities. The investment adviser has custody if a related person holds, directly or indirectly, client funds or securities, or has any authority to obtain possession of funds or securities, in connection with advisory services the investment adviser provides to clients. a. Custody includes: (1) Possession of client funds or securities unless the investment adviser receives the funds or securities inadvertently and returns the funds or securities to the sender within three business days of receiving the funds or securities and the investment adviser maintains the records required under section 10-04-10.3. (2) Any arrangement, including a general power of attorney, under which the investment adviser is authorized or permitted to withdraw client funds or securities maintained with a custodian upon the investment adviser 's instruction to the custodian; and (3) Any capacity, such as general partner of a limited partnership, managing member of a limited liability company or a comparable position or another type of pooled investment vehicle, or trustee of a trust, that gives the investment adviser or its supervised person legal ownership of or access to client funds or securities. b. Receipt of checks drawn by clients and made payable to third parties does not meet the definition of custody if forwarded to the third party within three business days of receipt and the investment adviser maintains the records required under section 10-04-10.3. 8. "Qualified custodian" means the following: a. A depository institution; b. A broker-dealer registered in this jurisdiction and with the securities and exchange commission holding the client assets in customer accounts; c. A registered futures commission merchant registered under section 4f(a) of the Commodity Exchange Act [7 U.S.C. 1 et seq.], holding the client assets in customer accounts, but only with respect to client funds and security futures, or other securities incidental to transactions in contracts for the purchase or sale of a commodity for future delivery and options; and d. A foreign financial institution that customarily holds financial assets for its customers, provided that the foreign financial institution keeps the advisory clients' assets in customer accounts segregated from its proprietary assets.
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