14.2 Advisory Contracts
Advisory contracts govern the legal relationship between client and fiduciary. NASAA Model Rules enforce strict restrictions on performance compensation and assignment.
Key NASAA Exam Takeaways
- Advisory contracts under the Uniform Securities Act MUST be in writing (federal law does not strictly require writing, but standard practice adheres).
- No Assignment Clause: Advisory contracts cannot be assigned to another adviser without the client's explicit written consent.
- Partnership Notification: Any change in minority partnership interests must be communicated to clients within a reasonable time; change in majority control is an assignment requiring consent.
- No Hedge Clauses: Exculpatory / hedge clauses purporting to waive liability under state or federal securities laws are VOID and UNLAWFUL.
- Performance-Based Fees are prohibited UNLESS the client is a 'Qualified Client' (under Rule 205-3: $1.3M AUM or $2.6M net worth).
Knowledge Checkpoint • Section 14.2
A state-registered investment adviser enters into a contract with a retail client with a net worth of $500,000. The contract contains a provision granting the adviser 15% of all net portfolio gains above the S&P 500. Is this provision permissible?