Chapter DFI-Sec 5

DFI-Sec 5.035(4)(c)2. 2. A registered futures commission merchant registered under section 4f(a) of the commodity exchange act, holding the client assets in client accounts, but only with respect to clients’ funds and security futures, or other securities incidental to transactions in contracts for the purchase or sale of a commodity for future delivery or options thereon.

DFI-Sec 5.035(4)(c)3. 3. A foreign financial institution that customarily holds financial assets for its clients, provided that the foreign financial institution keeps the advisory clients’ assets in client accounts segregated from its proprietary assets.

DFI-Sec 5.035(4)(d) (d) “Independent representative” for purposes of this section means a person that satisfies the requirements in each of the following paragraphs:

DFI-Sec 5.035(4)(d)1. 1. The person acts as an agent for an advisory client, and the person by law or contract is obliged to act in the best interests of the advisory client. An advisory client includes, in the case of a pooled investment vehicle, a limited partner of a limited partnership, a member of a limited liability company, or a beneficial owner of another type of pooled investment vehicle.

DFI-Sec 5.035(4)(d)2. 2. The person does not control, is not controlled by, and is not under common control with, the investment adviser.

DFI-Sec 5.035(4)(d)3. 3. The person does not have, and has not had within the past two years, a material business relationship with the investment adviser.

DFI-Sec 5.035 History History: Cr. Register, December, 1999, No. 528, eff. 1-1-00; CR 04-074: renum. (4) (a) from s. DFI-Sec 1.02 (17) and r. and recr. Register December 2004 No. 588, eff. 1-1-05; CR 08-077: am. (1) (intro.), (b) to (f), (2) (b) 1. b., (f), (3) (a) (intro.), 1. h. to j., 2. a., (b), (4) (a), (c) and (d) 1. Register December 2008 No. 636, eff. 1-1-09.

DFI-Sec 5.04 DFI-Sec 5.04 Reporting requirements.

DFI-Sec 5.04(1) (1) Every investment adviser shall file with the division immediate notice via facsimile or other electronic means whenever the net worth of the investment adviser is less than is required under s. DFI-Sec 5.02 (1), specifying the amount of net worth on the date of the notice and the steps the investment adviser has taken or will take to come into compliance.

DFI-Sec 5.04(2) (2) Each investment adviser shall file with the division a copy of any complaint related to its business, transactions, or operations in this state, naming the investment adviser or any of its partners, officers or investment adviser representatives as defendants in any civil or criminal proceeding, or in any administrative or disciplinary proceeding by any public or private regulatory agency, within 20 days of the date the complaint is served on the investment adviser; a copy of any answer or reply to the complaint filed by the investment adviser within 10 days of the date the answer or reply is filed; and a copy of any decision, order or sanction made with respect to any such proceeding within 20 days of the date the decision, order or sanction is rendered.

DFI-Sec 5.04(3) (3) 

DFI-Sec 5.04(3)(a) (a) Except as provided in subs. (2) and (4), each investment adviser shall file with the division any notice of change of control or change of name, as well as any material change in the information included in the investment adviser’s most recent application for registration, in an amendment to Form ADV filed with the division within 30 days of the date of the change.

DFI-Sec 5.04(3)(b) (b) Each investment adviser shall file a complete, updated Form ADV with the investment adviser registration depository within 90 days of the end of its fiscal year.

DFI-Sec 5.04(3)(c) (c) Each investment adviser representative and his or her employing investment adviser or federal covered investment adviser shall update information contained in an investment adviser representative’s application by filing an amendment to Form U-4 with the central registration depository within 30 days of the date of the event that requires filing of the amendment.

DFI-Sec 5.04(4) (4) Each investment adviser shall notify the division in writing within 10 days from the first date the person who is the designated supervisor under s. DFI-Sec 5.05 (7) no longer is acting in that capacity. The notification shall either identify a substituted designated supervisor or undertake to identify to the division in writing a substituted designated supervisor within the 45 day period provided under s. DFI-Sec 5.05 (7).

DFI-Sec 5.04(5) (5) 

DFI-Sec 5.04(5)(a) (a) Each investment adviser shall notify the division in writing within 14 days of either the opening or the change of address in this state of any branch office as defined in s. DFI-Sec 1.02 (7).

DFI-Sec 5.04(5)(b) (b) Each investment adviser shall notify the division in writing at least 14 days after the closing in this state of any branch office as defined in s. DFI-Sec 1.02 (7).

DFI-Sec 5.04(5)(c) (c) The notification provided to the division under par. (a) or (b) shall be made through the investment adviser registration depository for registered investment advisers. Federal covered investment advisers shall provide the notification directly to the division.

DFI-Sec 5.04(5)(d) (d) The notice filed for a branch opening pursuant to par. (a) is deemed filed in accordance with par. (c) upon receipt by the division of the appropriate filing fee and any late filing fee due pursuant to s. DFI-Sec 7.01 (6) (d).

DFI-Sec 5.04(6) (6) Each investment adviser shall file a branch office renewal notice annually under par. (a) or (b), as applicable.

DFI-Sec 5.04(6)(a) (a) Through the investment adviser registration depository for registered investment advisers;

DFI-Sec 5.04(6)(b) (b) Directly with the division for federal covered investment advisers, not later than December 1.

DFI-Sec 5.04 History History: Cr. Register, December, 1977, No. 264, eff. 1-1-78; am. (2) to (4), Register, December, 1980, No. 300, eff. 1-1-81; am. (1) and cr. (1) (b), Register, December, 1982, No. 324, eff. 1-1-83; cr. (5), Register, December, 1989, No. 408, eff. 1-1-90; am. (1) (a), r. and recr. (3), r. (4), renum. (5) to be (4), Register, December, 1990, No. 420, eff. 1-1-91; am. (1) (a), cr. (5) and (6), Register, December, 1991, No. 432, eff. 1-1-91; am. (1) (a), cr. (1) (c), Register, December, 1994, No. 468, eff. 1-1-95; r. and recr. (1), Register, December, 1995, No. 480, eff. 1-1-96; am. (1), cr. (7) and (8), Register, December, 1998, No. 516, eff. 1-1-99; am. (1), Register, December, 1999, No. 528, eff. 1-1-00; CR 01-082: am. (5) (a), Register December 2001 No. 552, eff. 1-1-02; CR 02-102: r. (7) and (8), Register December 2002 No. 564, eff. 1-1-03; CR 08-077: am. (1), (5) (a) and (b), renum. (3) to be (3) (a) and am., (3) (b) and (c) renum. from DFI-Sec 5.01 (2) (d) 2. and 3. and am. (3) (c), r. and recr. (5) (c) and (6) Register December 2008 No. 636, eff. 1-1-09; CR 10-062: cr. (5) (d), am. (6) (b) Register September 2010 No. 657, eff. 10-1-10.

DFI-Sec 5.05 DFI-Sec 5.05 Practice and advisory contract rules.

DFI-Sec 5.05(1) (1) Each investment adviser shall establish written supervisory procedures and a system for applying the procedures, which may reasonably be expected to prevent and detect any violations of ch. 551, Stats., and rules and orders thereunder. The procedures shall include the designation and registration of a number of supervisory employees reasonable in relation to the number of its registered investment adviser representatives, offices and activities in this state.

DFI-Sec 5.05(2) (2) An investment adviser shall not enter, extend, or renew any investment advisory contract if the contract:

DFI-Sec 5.05(2)(a) (a) Provides for compensation to the investment adviser on the basis of a share of capital gains upon, or capital appreciation of, the funds or any portion of the funds of a client other than a person specified in s. 551.403 (2), Stats., or s. DFI-Sec 5.13.

DFI-Sec 5.05(2)(b) (b) Fails to provide, in substance, that no assignment of the contract may be made without the consent of the client; or

DFI-Sec 5.05(2)(c) (c) Fails to provide, in substance, that the investment adviser, if a partnership, shall notify the other party to the contract of any change in the membership of the partnership within a reasonable time after such change.

DFI-Sec 5.05(2)(d) (d) Fails to disclose, in substance, the term of the advisory agreement, the fee to be charged by the adviser, the formula for computing the advisory fee, the formula for computing the amount of prepaid fee to be returned in the event of contract termination or non-performance, and whether the contract grants discretionary power to the adviser.

DFI-Sec 5.05(3) (3) Subsection (2) (a) shall not prohibit an investment advisory contract which provides for compensation based upon the total value of a fund averaged over a definite period, or as of definite dates or taken as of a definite date. “Assignment,” as used in sub. (2) (b) includes any direct or indirect transfer or hypothecation of an investment advisory contract by the assignor or of a controlling block of the assignor’s outstanding voting securities by a security holder of the assignor; but, if the investment adviser is a partnership, no assignment of an investment advisory contract is considered to result from the death or withdrawal of a minority of the members of the investment adviser having only a minority interest in the business of the investment adviser, or from the admission to the investment advisor of one or more members who, after admission, will be only a minority of the members and will have only a minority interest in the business. As used in sub. (2), “investment advisory contract” means any contract or agreement whereby a person agrees to act as investment adviser or to manage any investment or trading account for a person other than persons specified under s. 551.403 (2), Stats., or s. DFI-Sec 5.12.

DFI-Sec 5.05(4) (4) An investment adviser shall not enter any contract with a client if the contract contains any condition, stipulation or provision binding the client to waive any rights under ch. 551, Stats., or any rule or order thereunder. Any such condition, stipulation or provision is void.

DFI-Sec 5.05(5) (5) No registered investment adviser may enter into, extend or renew any investment advisory contract with a client in this state unless the contract is in writing and a copy of the contract is given to the client within 20 days after the execution of the contract.

DFI-Sec 5.05(6) (6) Each investment adviser who renders account supervisory or management services shall provide at least annually to each Wisconsin client a written summary of the client’s account which includes information setting forth the name, quantity and market value of each security under management, and the total value of cash and securities under management.

DFI-Sec 5.05(7) (7) Every registered investment adviser shall employ at its principal office or designated office of supervision in accordance with s. DFI-Sec 5.03 (1), at least one person designated in writing on the form prescribed in s. DFI-Sec 9.01 (1) (b) and filed with the division to act in a supervisory capacity who is registered as an investment adviser representative in this state and has satisfied the supervisory examination requirement in s. DFI-Sec 5.01 (5). If a registered investment adviser is not in compliance with the requirements of this paragraph, it has 45 days from the first date of noncompliance to meet the requirements of this paragraph.

DFI-Sec 5.05(8) (8) 

DFI-Sec 5.05(8)(a) (a) Unless otherwise provided in this subsection, each investment adviser shall furnish to each client and prospective client a firm brochure and one or more supplements as required by this subsection. The brochure and any required supplement shall contain all information required by Part 2 of Form ADV and such other information as the division may require.

DFI-Sec 5.05(8)(b) (b)

DFI-Sec 5.05(8)(b)1. 1. Each investment adviser shall furnish the current brochure required by this section, and the current brochure supplement for each investment adviser representative who will provide advisory services, to a client or prospective client.

DFI-Sec 5.05(8)(b)2. 2. For purposes of this subsection, an investment adviser representative is deemed to provide advisory services for a client if the investment adviser representative does any of the following:

DFI-Sec 5.05(8)(b)2.a. a. Regularly communicates investment advice to that client.

DFI-Sec 5.05(8)(b)2.b. b. Formulates investment advice for assets of that client.

DFI-Sec 5.05(8)(b)2.c. c. Makes discretionary investment decisions for assets of that client.

DFI-Sec 5.05(8)(b)2.d. d. Solicits, offers or negotiates for the sale of or sells investment advisory services.

DFI-Sec 5.05(8)(b)3. 3. The documents required in subd. 1. shall be furnished at the following times:

DFI-Sec 5.05(8)(b)3.a. a. Not less than 48 hours prior to entering into any investment advisory contract with a client or prospective client.

DFI-Sec 5.05(8)(b)3.b. b. At the time of entering into any contract, if the contract specifically provides that the client has a right to terminate the contract without penalty within five business days after entering into the contract.

DFI-Sec 5.05(8)(c) (c) Each investment adviser shall, at least once a year, without charge, furnish or offer in writing to furnish to each of its clients the current brochure and any current brochure supplements required by par. (a). If a client accepts the written offer, the investment adviser shall send to that client the current brochure and supplements not later than 7 days after the investment adviser is notified of the acceptance.

DFI-Sec 5.05(8)(d) (d) If the adviser is the general partner of a limited partnership, the manager of a limited liability company, or the trustee of a trust, then for purposes of this subsection, the investment adviser shall treat each of the partnership’s limited partners, the company’s members, or the trust’s beneficial owners as a separate client. For purposes of this subsection, a limited liability partnership or limited liability limited partnership is also considered to be a limited partnership.

DFI-Sec 5.05(8)(e) (e)

DFI-Sec 5.05(8)(e)1. 1. Each investment adviser that is a sponsor of a wrap fee program shall furnish to a client or prospective client in lieu of the brochure required in par. (b), a wrap fee brochure containing all information required by Form ADV. All information in a wrap fee brochure shall be limited to information applicable to wrap fee programs that the investment adviser sponsors.

DFI-Sec 5.05(8)(e)2. 2. An investment adviser is not required to offer or furnish the wrap fee brochure if another sponsor of the wrap fee program offers or furnishes to the client or prospective client of the wrap fee program a wrap fee program brochure containing all the information that the investment adviser’s wrap fee program brochure must contain.

DFI-Sec 5.05(8)(e)3. 3. A wrap fee brochure shall not be used in place of any brochure supplement that the investment adviser is required to furnish under par. (b) 1.

DFI-Sec 5.05(8)(f) (f) Each investment adviser shall amend its brochure and any brochure supplement and deliver the amendments to clients not more than 30 days from the date that the information contained in the brochure or brochure supplement becomes materially inaccurate. The investment adviser shall comply with the instructions to Part 2 of Form ADV regarding updating and delivery.

DFI-Sec 5.05(8)(g) (g) Each investment adviser that renders substantially different types of investment advisory services to different clients may provide them with different brochures, provided that each client receives all applicable information about services and fees. The brochure furnished to a client may omit any information required by Part 2 of Form ADV if such information is applicable to only a type of investment advisory service or fee that is not rendered or charged, or proposed to be rendered or charged, to that client or prospective client.

DFI-Sec 5.05(8)(h) (h) Nothing in this subsection shall relieve any investment adviser from any obligation pursuant to any provision of ch. 551, Stats., or other federal or state law to disclose any information to its clients or prospective clients not specifically required by this rule.

DFI-Sec 5.05(9) (9) Each investment adviser that participates in a wrap fee arrangement with a broker-dealer shall disclose to each client under the arrangement the portion of the wrap fee that is attributable to advisory services. This requirement may be satisfied if the information is contained in the brochure provided to the client either by the investment adviser or the sponsor of the wrap fee arrangement.

DFI-Sec 5.05(10) (10) No investment adviser may associate with a bank, savings institution, trust company, savings and loan association or credit union by contract, agreement or other means for the purpose of that entity publishing or circulating advertising promoting the services offered by the investment adviser or assisting or providing information to persons to establish an advisory relationship with the investment adviser unless the promotional functions are performed by persons registered as representatives of the investment adviser.

DFI-Sec 5.05(11) (11) Each investment adviser which by contract, agreement or other means provides investment advisory services on the premises of a financial institution that is not registered as an investment adviser shall:

DFI-Sec 5.05(11)(a) (a) Perform the investment advisory services within a specific area on the premises of the financial institution designated by agreement between the investment adviser and the financial institution. Nothing in this paragraph prohibits the financial institution from carrying out other activities within the designated area, provided that no promotional signs or materials shall be displayed within the designated area other than those relating to the investment advisory services;

DFI-Sec 5.05(11)(b) (b) Prominently display the identity of the registered investment adviser in the area on the premises of the financial institution designated under par. (a);

DFI-Sec 5.05(11)(c) (c) Disclose the identity of the registered investment adviser in, without limitation because of enumeration, all advertising, correspondence, business cards, promotional materials and records relating to the investment adviser’s services provided on the premises of the financial institution. Materials described in this paragraph may not display the financial institution’s name or logotype in a manner that would mislead clients as to the financial institution’s role in connection with the investment advisory services being offered by the investment adviser. For purposes of this paragraph, if the investment adviser’s name is no less prominent in the materials than the name of the financial institution in the size, style or color of type or in the placement or by use of logotypes, the materials are presumed to be not misleading.

DFI-Sec 5.05(11)(d) (d) Establish written supervisory procedures and a system for applying the procedures. The procedures shall comply with s. DFI-Sec 5.05 (1) and shall be designed to accomplish certain supervisory functions, including but not limited to the following:

DFI-Sec 5.05(11)(d)1. 1. Prevention and detection of violations of ch. 551, Stats., and any applicable rules and orders under ch. 551, Stats.

DFI-Sec 5.05(11)(d)2. 2. Establishment of a system under which the investment adviser approves, prior to use, copies of all advertising used by the financial institution relating to the investment advisory services conducted on the premises of the financial institution for the purpose of ensuring compliance with ss. 551.501, 551.502 and 551.504, Stats.; and

DFI-Sec 5.05(11)(d)3. 3. Establishment of a system that ensures that all books and records required by rule or order under ch. 551, Stats., are properly maintained.

DFI-Sec 5.05(11)(e) (e) Disclose in writing prior to or at the time of entering into each investment advisory agreement that the investment advisory services are provided by the investment adviser and not by the financial institution, that non-deposit investment products are not guaranteed by the financial institution, are not deposits or other obligations of the financial institution, are not subject to any federal deposit insurance protection and involve risk, including possible loss of principal.

DFI-Sec 5.05(11)(f) (f) Notify the division at the time of filing notice of opening or change of address of a branch office as required in s. DFI-Sec 5.04 (5), that the office is located on the premises of a financial institution in this state, which notification shall include the identity of the institution.

DFI-Sec 5.05(12) (12) No investment adviser or its investment adviser representative, in connection with a telephone or electronic solicitation, shall:

DFI-Sec 5.05(12)(a) (a) Fail to provide both the caller’s identity and the identity of the investment adviser with whom the caller is affiliated, at the beginning of any telephone or electronic solicitation.

DFI-Sec 5.05(12)(b) (b) Telephone any person in this state between the hours of 9:00 PM and 8:00 AM local time at the called person’s location without the individual’s prior consent.

DFI-Sec 5.05(12)(c) (c) Telephone or electronically solicit any person in this state after that individual has requested that they not be telephoned.

DFI-Sec 5.05(12)(d) (d) Make repeated telephone or electronic solicitations in an annoying, abusive or harassing manner, either individually or in concert with others.

DFI-Sec 5.05(12)(e) (e) Use threats, intimidation or obscene language in connection with securities recommendations, transactions or other investment advisory activities.

DFI-Sec 5.05(13) (13) Each investment adviser shall provide clients with a written notification or invoice of fees due for investment advisory services. The notification or invoice shall specify the time period covered by the fee for ongoing supervisory or management services or shall detail the services rendered for preparation of financial plans or analyses.

DFI-Sec 5.05(14) (14) Any person entering into or performing an investment advisory contract under this rule is not relieved of any obligations under ch. 551, Stats., or rules thereunder.

DFI-Sec 5.05 History History: Cr. December, 1977, No. 264, eff. 1-1-78; am. (1), r. (5) and (6), cr. (2) (d), (5) to (7), Register, December, 1980, No. 300, eff. 1-1-81; am. (7), Register, December, 1982, No. 324, eff. 1-1-83; cr. (8), Register, December, 1987, No. 384, eff. 1-1-88; am. (2) (a) and (7), Register, December, 1989, No. 408, eff. 1-1-90; am. (5), Register, December, 1991, No. 432, eff. 1-1-92; am. (7), Register, December, 1992, No. 444, eff. 1-1-93; cr. (9), Register, December, 1994, No. 468, eff. 1-1-95; am. (7), Register, December, 1995, No. 480, eff. 1-1-96; am. (2) (a), (3), cr. (10) to (12), Register, December, 1996, No. 492, eff. 1-1-97; correction in (2) (a) made under s. 13.93 (2m) (b) 7., Stats., Register, April, 1998, No. 508; am. (1), (11) (d) 3. and (12) (intro.), Register, December, 1998, No. 516, eff. 1-1-99; cr. (11) (f), Register, December, 1999, No. 528, eff. 1-1-00; cr. (13) and (14), Register, December, 2000, No. 540, eff. 1-1-01; emerg. r. and recr. (8), eff. 1-1-01; CR 01-025: r. and recr. (8), Register July, 2001, No. 547 eff. 8-1-01; CR 02-102: r. (14), Register December 2002 No. 564, eff. 1-1-03; CR 08-077: am. (title), (1), (2) (a), (b), (3) to (7), (8) (a), (b) 1., 3. (intro.), (c), (e), (g), (9), (10), (11) (intro.), (b), (c) and (d) 2., cr. (14) Register December 2008 No. 636, eff. 1-1-09; CR 09-056: am. (2) (a) Register December 2009 No. 648, eff. 1-1-10; CR 10-062: r. (8) (i) Register September 2010 No. 657, eff. 10-1-10; correction in (14) made under s. 13.92 (4) (b) 7., Stats., Register September 2010 No. 657.

DFI-Sec 5.06 DFI-Sec 5.06 Prohibited conduct. Except as otherwise provided in sub. (13), the following are deemed “dishonest or unethical business practices” or “taking unfair advantage of a client” by an investment adviser or an investment adviser representative under s. 551.412 (4) (m), Stats., without limiting those terms to the practices specified in this section:

DFI-Sec 5.06(1) (1) Exercising any discretionary power in placing an order for the purchase or sale of securities for the account of a client without first obtaining written discretionary authority from the client 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.

DFI-Sec 5.06(2) (2) Placing an order to purchase or sell a security for the account of a client upon instructions of a third party without first having obtained written third party trading authorization from the client;

DFI-Sec 5.06(3) (3) Inducing trading in a client’s account that is excessive in size or frequency in view of the financial resources and character of the account;

DFI-Sec 5.06(4) (4) Recommending to a client 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 investment adviser;

DFI-Sec 5.06(5) (5) Placing an order to purchase or sell a security for the account of a client without authority to do so;

DFI-Sec 5.06(6) (6) Borrowing money or securities from, or lending money or securities to, a client, unless that client is a financial institution or institutional investor designated in s. 551.401 (2) (b) or (c), Stats.

DFI-Sec 5.06(7) (7) Misrepresenting to any client, or prospective client, the qualifications of the investment adviser, investment adviser representative, federal covered investment adviser, or any employee, or person affiliated with the investment adviser, investment adviser representative or federal covered investment adviser, or misrepresenting the nature of the advisory services being offered or fees to be charged for such service, or to omit 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.

DFI-Sec 5.06(8) (8) Placing an order for the purchase or sale of a security if the security is not registered or the security or transaction is not exempt from registration under ch. 551, Stats.

DFI-Sec 5.06(9) (9) Placing an order for a client, or recommending that the client place an order, to purchase or sell a security through a broker-dealer or agent not registered under ch. 551, Stats., unless the client is a person described in s. 551.403 (2) (a), Stats., or s. DFI-Sec 5.12.

DFI-Sec 5.06(10) (10) Recommending to a client that the client engage the services of a broker-dealer, agent or investment adviser not registered under ch. 551, Stats., unless the client is a person described in s. 551.403 (2) (a), Stats., or s. DFI-Sec 5.12.