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CALIFORNIA CORPORATE & SECURITIES LAW

Attention Investment Advisers: Rules Are Not Statutes

Last week, I cautioned the students in my Securities Regulation class that while it can be helpful to review the SEC filings of other registrants, one should never assume that they are correct.  A few days later, I noticed that the following statement in Item 10 of numerous brochures filed by investment advisers:

All material conflicts of interest under Section 260.238 (k) of the California Corporations Code are disclosed regarding the Adviser, its representatives or any of its employees, which could be reasonably expected to impair the rendering of unbiased and objective advice.

These investment advisers may well have disclosed all material conflicts, but they most certainly did not do so under Section 260.238(k) of the California Corporations Code.  That section simply doesn’t exist.  The Commissioner of Business Oversight has, however, adopted a rule – 10 CCR § 260.238.  That rule lists a large number of activities that “do not promote ‘fair, equitable or ethical principles,'” as used in Section 25238 of the California Corporations Code.  Number 11 on the list of activities is:

Failing to disclose to a client in writing before entering into or renewing an advisory agreement with that client any material conflict of interest relating to the adviser, its representatives or any of its employees, which could be reasonably expected to impair the rendering of unbiased and objective advice including: . . . .

10 CCR § 260.238(k).

I suspect that sometime in the long-forgotten past, an investment adviser confused the rule with the statute and other advisers (or their advisers) copied the error.  Perhaps some day in the future, another adviser will note my pettifogging and initiate a chain of corrections.

 

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