808 KAR 10:030. Conduct of broker-dealers, agents, and employees; investment advisers and representatives.

      RELATES TO: KRS 292.330

      STATUTORY AUTHORITY: KRS 292.330(12)(f), 292.500(3)

      NECESSITY, FUNCTION, AND CONFORMITY: KRS 292.500(3) authorizes the executive director to promulgate administrative regulations necessary to carry out the provisions of KRS Chapter 292. KRS 292.330(12)(f) authorizes the executive director to promulgate administrative regulations regulating the conduct of business by broker-dealers and investment advisers. This administrative regulation establishes requirements relating to the conduct of a broker-dealer, agent, investment adviser, or representative.

      Section 1. Suitability. A broker-dealer, agent, investment adviser, or investment adviser representative who recommends to a customer the purchase, sale or exchange of a security shall have reasonable grounds to believe that the recommendation is not unsuitable for the customer on the basis of:

      (1) information furnished by the customer after reasonable inquiry concerning the customer's investment objectives, financial situation and needs; and

      (2) Other information known by the broker-dealer, agent, investment adviser or investment adviser representative.

      Section 2. Supervision of Broker-dealer Agents. (1) Each agent shall be subject to the supervision of a supervisor designated by the broker-dealer employing the agent. The responsibilities of a designated supervisor with respect to each agent under his supervision shall include the prompt review and written approval of:

      (a) The opening of each new customer account by the agent;

      (b) Each securities transaction by the agent;

      (c) All incoming or outgoing correspondence including postal mail, electronic mail, and faxes;

      (d) All advertising, sales literature, and seminars; and

      (e) The handling of any customer complaint.

      (2) Either a registered principal of the broker-dealer or an agent's designated supervisor shall:

      (a) Review outside business activity by the agent;

      (b) Review any brokerage account owned by the agent;

      (c) Periodically review customer accounts of the agent; and

      (d) Regularly inspect the records of the agent at the agent's place of business.

      Section 3. Written Supervisory Procedures. (1) Broker-dealers.

      (a) Each broker-dealer shall establish, maintain and enforce written procedures that:

      1. Are reasonably designed to detect and prevent violations of:

      a. KRS Chapter 292, 808 KAR Chapter 10, and orders issued under that chapter;

      b. The rules promulgated by the Securities and Exchange Commission pursuant to 15 U.S.C. 78w; and

      c. If the broker-dealer is a member of a self-regulatory organization as defined in 15 U.S.C. 78c(a)(26), the rules of the self-regulatory organization pursuant to 15 U.S.C. 78s(b); and

      2. Include the procedures adopted by the broker-dealer to comply with the requirements of Section 2 of this administrative regulation.

      (b) The broker-dealer shall keep a copy of the procedures required by paragraph (a) of this subsection in each office where an agent transacts business in securities.

      (2) Investment advisers.

      (a) Except as provided in paragraph (b) of this subsection, each investment adviser shall:

      1. Establish, maintain, and enforce written procedures that are reasonably designed to detect and prevent violations of KRS Chapter 292, 808 KAR Chapter 10, and orders issued under that chapter; and

      2. Keep a copy of the procedures in each office where a representative provides investment advice to a client.

      (b) The requirements established in paragraph (a) of this subsection shall not apply to an investment adviser that:

      1. Has its principal place of business in a state other than Kentucky if the investment adviser is registered in that state and is in compliance with that state's written supervisory procedures requirements; or

      2. Has two (2) or fewer persons registered as an investment adviser representative of the investment adviser.

      Section 4. Written Disclosure Statement. (1) An investment adviser shall furnish each advisory client and prospective advisory client with a written disclosure statement. This statement may be either a copy of Part II of its Form ADV or a written document containing at least the information required by Part II of the Form ADV.

      (2)(a) Except as provided in paragraph (b) of this subsection, an investment adviser shall deliver the statement required by this section to an advisory client or prospective advisory client:

      1. Not less than forty-eight (48) hours prior to entering into any written or oral investment advisory contract with the client or prospective client; or

      2. At the time of entering into a contract, if the advisory client has a right to terminate the contract without penalty within five (5) business days after entering into the contract.

      (b) Delivery of the statement required by paragraph (a) of this subsection shall not be required in connection with entering into an investment company contract or a contract for impersonal advisory services.

      (3)(a) Except as provided in paragraph (b) of this subsection, an investment adviser shall, annually and without charge, deliver or offer in writing to promptly deliver upon written request, the statement required by this section to its advisory clients.

      (b) The delivery or offer required by paragraph (a) of this subsection shall not be required for advisory clients receiving advisory services solely pursuant to an investment company contract or a contract for impersonal advisory services.

      (4) If an investment adviser renders substantially different types of investment advisory services to different advisory clients, information required by Part II of the Form ADV may be omitted from the statement furnished to an advisory client or prospective advisory client if the information is not applicable to services rendered to that client.

      (5) This section shall not relieve an investment adviser from an obligation, pursuant to a provision of KRS Chapter 292, 808 KAR Chapter 10, or other federal or state law, to disclose information to its advisory clients or prospective advisory clients not specifically required by this section.

      Section 5. Multiple Registration. (1) A person shall not be concurrently registered as an agent of more than one (1) broker-dealer or issuer unless the person obtains prior written consent from the executive director.

      (2) A person shall not be concurrently registered as an investment adviser representative of more than one (1) investment adviser unless the person obtains prior written consent from the executive director.

      (3) A request for multiple registration shall be in writing and shall contain a statement by each employer that the employer:

      (a) Consents to the multiple employment of the agent or representative; and

      (b) Agrees to assume joint and several liability with all other employers for an act or omission of the agent or representative during the employment period that violates KRS Chapter 292, 808 KAR Chapter 10, or orders issued under that chapter.

      (4) The executive director shall consent to multiple registration pursuant to a request under subsection (3) of this section if the executive director finds that:

      (a) The multiple registration does not impair a determination of the supervisory responsibilities of each employer with respect to the employee; and

      (b) The disciplinary histories of the person and each employer are not unfavorable.

      (5) The executive director may consent to multiple registration in other cases if the executive director finds that the multiple registration does not impair determination of the respective supervisory responsibilities of each employer with respect to the employee.

Section 6. Incorporation by Reference. (1) Form ADV, Application for Registration of an Investment Adviser, revised May 31, 1997, is incorporated by reference.

      (2) This material may be inspected, copied, or obtained, subject to applicable copyright law, at the Office of Financial Institutions, 1025 Capital Center Drive, Suite 200, Frankfort, Kentucky 40601, Monday through Friday, 8 a.m. to 4:30 p.m.

                (3) This material may also be obtained from the Securities and Exchange Commission, Branch of BD and IA Registration, Washington, D.C. 20549. (SR 330(11)(f)-2; 1 Ky.R. 1094; eff. 6-11-75; 24 Ky.R. 2174; 25 Ky.R. 85; eff. 6-25-98; 26 Ky.R. 2042; 27 Ky.R. 770; eff. 9-11-2000.)