Polar Investment Counsel, Inc. Member FINRA, MSRB, NFA, SIPC

Transcription

1 Polar Investment Counsel, Inc. Member FINRA, MSRB, NFA, SIPC INVESTMENT ADVISER COMPLIANCE & PROCEDURES MANUAL CODE OF ETHICS October 2009 CRD #42847 Manual Implementation Date: June 2006 Approved by: Michael C. Jordan CCO Most Current Review Date: October 2009 Approved by: Michael C. Jordan CCO Most Current Revision Date: October 2009 Sherry L Abbott Sr VP, CFO Home Office Location: th Ave NE Thief River Falls MN (fax) - 1 -

2 TABLE OF CONTENTS SECTION 1: ORGANIZATION AND RESPONSIBILITIES 1.1 Written Supervisory Procedures Annual Review and Reporting SEC Registered Firms State Registered Firms 1.2 PICI Internal Controls 1.3 Staffing Chart 1.4 Investment Committee 1.5 Supervision Supervisory Review System Qualifications of Supervisory Personnel Overall Supervision Supervision of Personnel Sub-Advisers Associated Persons Investment Adviser Representatives (IARs) Dual Licensing Hiring and Registration Process Annual Personnel Review 1.6 Correspondence Review 1.7 Review 1.8 Disciplinary Actions SECTION 2: FILINGS AND DISCLOSURE TO CLIENTS; THE CLIENT AGREEMENT 2.1 Investment adviser (RIA) Registration and Reporting Form ADV Filing and Updating Form ADV-E Form ADV-W Form U Form 13-D Form 13-G Form 13-F - 2 -

3 2.2 State Requirements; Net Capital and Bonding 2.3 Disclosure to Clients Risk Disclosure Financial and Disciplinary Disclosure 2.4 The Brochure Rule Wrap Fee Programs 2.5 The Client Agreement Mandated by the Advisers Act of Other Suggested Provisions Mutual Funds Contracts SECTION 3: CLIENT RELATIONS; ESTABLISHING ACCOUNTS 3.1 Rules of General Conduct 3.2 Recommendations 3.3 Fiduciary Standard of Care Avoid Self-Dealing Consistency with Announced Strategies Follow Individual Client Guidelines Disclosure Communication/Feedback 3.4 Discretionary/Managed Accounts 3.5 Contacting Prospective Clients Federal Communications Commission Cold Calling Rule 3.6 Account Establishment Account Establishment Anti Money Laundering (AML) Rules Initial Review Ongoing Review SECTION 4: MANAGING CLIENT SERVICES 4.1 Safeguarding Client Funds and Securities SEC Custody Rules - 3 -

4 4.1.2 SEC Requirements if PICI Has Custody Exceptions to SEC Requirements State Requirements Supervision of Custodians 4.2 Portfolio Valuation 4.3 Reporting to Clients 4.4 Fees General Rule Performance Fees/Contingent Fees Arms Length Contract Fulcrum Fees Affiliated Investment Companies ERISA Clients Rebates and Waivers Solicitation and Referral Fees Sales Promotions and Allowances 4.5 Customer Complaints 4.6 Privacy of Consumer Financial Information 4.7 Voting Proxies SECTION 5: INVESTMENT AND TRADING PRACTICES 5.1 In General 5.2 Allocation of Investment Opportunities 5.3 ERISA Clients What Accounts are Covered Plan Fiduciary Standards Fees Prohibited Transactions Specific Types of Prohibited Transactions General Prohibition on Self-Dealing Prohibited Transaction Exemptions Liability for Breach of ERISA Rules - 4 -

5 Proxy Voting Custody of Plan Assets Minimum Capital requirements Bonding and Financial Statement Requirements 5.4 Use of Model Portfolios 5.5 Mutual Fund Status 5.6 Sub-Advisers and Third Party Managers ( TPAs ) Supervision of TPA Activities Due Diligence and Pre-Qualification Agreements Monitoring Adviser Qualifications Monitoring Portfolio Operations Monitoring Other Operations Reporting and Disclosure to Clients 5.7 Other Securities Trading Practices Selection of Brokers and Dealers Best Execution Soft Dollar and Directed Brokerage Use of Affiliated Broker Dealer In General ERISA Clients Bunched Orders and Allocation of Trades Agency and Principal Transactions With Clients Agency Cross Transactions Proprietary Trading Trading by Supervised Persons Trading Errors 5.8 Restrictions on Trading in Securities Use and Misuse of Research Misuse of Material Inside Information Material Nonpublic Information Examples Penalties for Misuse Personal Securities Transactions - 5 -

6 Restricting Access Chinese Wall Procedures Restricted and Watch Lists Mergers, Tender Offers, etc Hot Issues Restrictions Exception Reports; Investigations SECTION 6: SALES AND ADVERTISING 6.1 Advertising Defined 6.2 Advertising Approval 6.3. Fraudulent, Deceptive or Manipulative 6.4. Compliance Review - Specific Practices 6.5. Performance Advertising Clover Rule Fees and Expenses Predecessor Advisers AIMR Standards 6.6 Fund Prospectus/Sales Material Funds Offered by Others Funds Offered by PICI SECTION 7: PARTICULAR PRODUCTS AND SERVICES 7.1 Hedge Funds and Private Investment Partnerships Adviser Registration for Hedge Funds Managers General Concerns as to Partnerships, Hedge Funds, etc SECTION 8: RECORDS AND SECURITY 8.1 Records Retention Requirements Federal vs. State Requirements Journals Auxiliary Ledgers - 6 -

7 8.1.4 Brokerage Orders Check Books Bills and Statements Financial Statements Written Communications Retention Discretionary Accounts Powers of Attorney Written Agreements Circulars and Advertisements Securities Transactions by PICI and Associates Brochure Delivery, Receipt, Acknowledgment Solicitor Disclosure Agreements, Statements, Receipts Performance Advertising Records Customer Account Records Associate Records Written Supervisory Procedures Basic Documents 8.2 Security of Systems and Information Policy Access to Facilities, Electronic Systems and Data Reports and Other Communications Client Information Corporate Policy and Procedures for Computer Security 8.3 Business Continuity Plan - 7 -

8 SECTION 1: ORGANIZATION AND RESPONSIBILITIES 1.1 Written Supervisory Procedures Annual Review and Reporting SEC Registered Firms. As of October 5, 2004 new SEC Rule 206(4)-7 became effective requiring all SEC registered advisers to (a) adopt and implement written policies and procedures reasonably designed to prevent and detect violations of the securities laws and rules by the adviser and its supervised persons, (b) review no less frequently than annually the adequacy of the policies and procedures and the effectiveness of their implementation and (c) designate a Chief Compliance Officer who is a supervisory person responsible for administering the policies and procedures. The written supervisory procedures set forth in this Manual are designed to comply with the new Rule. The Chief Compliance Officer should be someone who is both competent and knowledgeable regarding federal securities laws and empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the firm. This person must also have full responsibility for all compliance personnel as well as overall responsibility for the firm s compliance program. Lastly, the Chief Compliance Officer must be vested with sufficient seniority and authority within the organization to compel others to follow the firm s compliance policies and procedures. PICI hereby designates Michael C. Jordan as its Chief Compliance Officer. Qualifications. The Chief Compliance Officer must have one or more of the following professional qualifications: 1. FINRA Series 65 or 66 examinations, or 2. FINRA Series 24 examination, or 3. Comparable financial industry experience or regulatory practices. Rule 206(4)-7 requires that the annual review of PICI policies and procedures consider any compliance matters that arose during the previous year, any changes in the business activities of the adviser or its affiliates, and any changes in the Advisers Act or applicable regulations that might suggest a need to revise the policies or procedures. The first annual review must take place not later than twelve (12) months after the date of adoption. Although the Rule requires only annual reviews it recommends that advisers consider the need for interim reviews in response to significant compliance events, changes in business arrangements, and regulatory developments. In addition to Rule 206(4)-7, Section 203(e)(5) of the Advisers Act has for some time contained a safe harbor for investment advisers and supervisors from SEC sanctions for failure to supervise if: The adviser establishes procedures that would reasonably be expected to prevent and detect violations of the federal securities laws; The adviser has in place a system for applying the procedures; The supervisor has reasonably discharged his or her supervisory responsibilities; and - 8 -

9 The supervisor has no reason to believe the person was not complying with the procedures and system. 1.2 PICI Internal Controls In addition to the requirement of written supervisory procedures, Rule 206(4)-7 requires that SEC registered advisers have in place a set of internal controls to implement these procedures. The internal controls are designed to provide clear standards by which disciplinary measures may be taken internally in the event of a violation, including disciplinary interviews, special review or training, written communications that go on the associate s record, fines or suspension/reassignment or termination of employment and/or referral to regulatory authorities. The firm s establishment and ongoing review and testing of its internal controls will be designed with the following objectives in mind: Meeting all relevant regulatory deadlines; Reviewing the firms compliance obligations from a risk based perspective; Documenting the actual work flows present in the firm s operations; Demonstrating that the written supervisory procedures and internal controls that have been implemented properly address the risks present in firm operations and, upon testing and reviews, reasonably attempt to fill any potential gaps uncovered; Creation of books and records demonstrating compliance with Rule 206(4)-7 including testing methodologies and any issues detected and resolved (red flags). The following chart summarizes the internal controls in effect at PICI to address the areas identified in the Rule: Area WSP Reference Responsible Principal Testing Frequency 1. Portfolio Mgt Sec 5 OSJ Managers Monthly 2.Trading Practices Sec 5 OSJ Managers Monthly 3.Personal Transactions Sec 5 MCJordan Monthly 4.Disclosure to Clients Sec 2 MCJordan Annually or as needed 5.Custody of Assets Sec 4 N/A N/A 6. Record Keeping Sec 8 OSJ Managers Monthly 7. Sales and Advertising Sec 6 OSJ Managers Monthly 8. Fees and Calculation Sec 4 OSJ Managers Monthly 9. Consumer Privacy Sec 4 MCJordan Annually 10. Business Continuity Sec 8 MCJordan Annually - 9 -

10 1.3 Staffing Chart The individuals currently responsible for exercising the responsibilities set forth in this Manual are listed in the Staffing Chart below. PICI STAFFING CHART Name Title(s) CRD/IARD No. Location(s) Where Person Regularly Conducts Business MCJordan President CEO,CCO, FINOP Designated Supervisor Home Office N/A N/A SLAbbott Sr VP, CFO Home Office MCJordan N/A Location Of Supervisor Listed in HO Internal Procedures Manual OSJ Mgrs Listed in HO Internal Procedures Manual Various (Listed in HO Internal Procedures) MCJordan Home Office 1.4 Investment Committee Although PICI does not maintain a formal Investment Committee, any related decisions that would normally be made by the committee will be executed by the individual(s) supervising a particular account(s), their supervisor(s) and MCJordan. The nature of PICI s business does not involve the establishment and monitoring of model portfolios or otherwise establish a self-sponsored asset management program which is proprietary to PICI. Therefore, an Investment Committee has not been formed to address such issues. The committee will be formed in the future, should PICI s business model and/or product offerings warrant its establishment in the future. 1.5 Supervision This Manual sets forth written procedures by which the Firm supervises its activities. In addition, it describes the Supervisory System in place to oversee the implementation of the Procedures Supervisory Review System The Firm s Supervisory System has the following general components: Designation of responsible supervisory personnel Description of review process Documentation of reviews Specified frequency of reviews Monitoring performance of automated compliance systems Monitoring effectiveness of supervisory personnel Monitoring adequacy of outside service bureau compliance Description of steps to remedy deficiencies Procedure updates to reflect rule changes Retaining records of past procedures

11 1.5.2 Qualifications of Supervisory Personnel When designating supervisory personnel and responsibilities, PICI shall ensure that each Principal shall have proper licensing and employment qualifications. The CEO is responsible for hiring or appointing designated supervisors. In doing so, the CEO together with the Chief Compliance Officer must determine that supervisors understand and can effectively conduct their requisite responsibilities. In this regard, the Firm will consider the experience the supervisor possesses and determine that the individual is qualified by experience or that it is necessary to arrange training to ensure the person is qualified to supervise. In addition, the performance and effectiveness of supervisory personnel will be reviewed periodically at least annually to ensure continued qualification Overall Supervision Each Associated Person of PICI is assigned to an appropriate supervisor within Firm who shall be responsible for supervising that person's activities. The Compliance Department shall maintain a record of all such assignments. The Chief Compliance Officer implements the following procedures: All Associated Persons have access to a current copy of this Manual; Periodic review and amendment of this Manual if and when applicable. Any new insertions are available to all Manual owners; Proper licensing of all personnel in the jurisdictions where required; Periodic compliance meetings to cover new topics and review areas of concern Periodic review of: The adequacy and completeness of the supervisory procedures in the light of current operational and regulatory climate; and The compliance of advisory personnel with the supervisory procedures Supervision of Personnel The CCO or his designee is responsible for supervising operations at the Home Office, including Licensing, Compliance, Cashier, etc., including, but not limited to, the following functions: Determine that each person employed in the business is properly qualified, licensed and registered (if applicable) to perform the function assigned; Confirm that the licensing and registration requirements for the Firm have been met and are being currently maintained; Report to the regulatory authorities all changes in Form U-4, IAR, and other filings required; Interview all prospective Associated Persons and review the required information prior to accepting them as Associated Persons of the Firm; Periodically review all personal accounts and personal trading; Review and approve all communications with customers; Supervise access of personnel to Firm and customer records and files; Review and approve advertising and electronic communications; Review outside business activities of Associated Persons; and Supervise compliance with SEC rules on solicitation payments

12 Details of these reviews are further described throughout this Manual in the sections related to oversight of specific activities. PICI has also designated an Office Supervisor for each offsite location. In turn all Office Supervisors are supervised as to compliance matters by the Chief Compliance Officer. Individual supervisor name and address can be found in the Home Office Internal Policies and Procedures Manual Sub-Advisers Advisers may utilize the services of third party sub-advisers to provide investment advisory services on a contract basis. The relationship with the sub-adviser will be properly disclosed in the adviser s brochure and Form ADV. Where the sub-adviser performs management services for a client of the adviser, a copy of the Sub-Adviser s Form ADV Part II or brochure will be delivered to the client prior to assigning the sub-adviser to manage the client s account. PICI has several sub-advisory relationships Associated Persons Section 202(a)(17) of the Advisers Act defines a person associated with an investment adviser (an Associated Person ) as any partner, officer, director of the adviser and any person directly or indirectly controlling or controlled by such investment adviser, including any associate of such investment adviser. Section 203(c)(1) of the Advisers Act imposes statutory disqualifications on advisers and Associated Persons, including willful false filings, convictions within 10 years prior for securities felonies or misdemeanors, violations of antifraud statutes, permanent or temporary injunction against service as an adviser, aiding or abetting in violations, failure to supervise, and SEC suspension or bar orders. It is the responsibility of PICI to make reasonable inquiry of prospective Associated Persons or to make sure that they are not subject to statutory disqualification and to disclose any adverse information to the regulators. Michael C Jordan or his designee will be responsible for making such inquiries and investigating any issues that may arise.. Schedule A of Form ADV requires additional disclosure for Associated Persons, including: an officer, director, control person or over 10% equity owner; a member of the investment committee that determines general investment advice to be given to clients; or an individual giving investment advice on behalf of the applicant in the jurisdictions in which the application has been filed. Additions and deletions to Schedule A must be filed as amendments using Schedule C, when they take place. In addition, investment committee members must be described on Schedule F

13 Michael C Jordan or his designee is responsible for ensuring Form ADV Schedule A is accurate and up to date Investment Adviser Representatives (IARs) Most State investment adviser laws and regulations require separate registration of investment adviser representatives (IARs). The SEC has no requirements for separate registration of IAR s. State IAR definitions vary widely and state laws and regulations will be carefully checked prior to conducting advisory business in any new jurisdictions. In general, an IAR is any individual (whether or not an associate) who provides investment advisory services on behalf of an investment adviser. Typically states will require at least one IAR registration in addition to PICI s own registration before it can do business in that state. PICI is responsible for having procedures in place which require IARs to register in any jurisdictions where they do business. IAR s are prohibited from conducting business in jurisdictions where the firm is not appropriately registered and/or notice filed. The CCO is responsible for ensuring that all PICI IAR s are appropriately qualified and licensed to offer advisory services in the jurisdictions in which PICI is registered. The rules imposed by the states for IAR registration vary. See for a directory of state addresses and websites. Most states require that the IAR obtain a FINRA Series 65 or 66 qualification plus a demonstration of some prior industry experience. Registration of IARs is handled through the IARD system and most states use the FINRA Form U-4 as a basic application form, Registrations require a fee as do the annual renewals. Some states require additional documents to properly register IAR s. Solicitors. Under many state laws and regulations persons who solicit customers for new accounts and receive referral or other compensation in this connection are required to register as IARs. Advisers should take care to verify the registration status of persons who do not themselves render investment advice but who do solicit on behalf of the firm. This generally includes professionals such as financial planners, accountants or attorneys that refer business to the adviser in exchange for compensation. These persons are not formally required to be disclosed in Form ADV Part II of the RIA, because they do not themselves render any investment advice. Many states, however, require that these persons register as IARs if they are receiving compensation for their solicitation efforts. The CCO will be responsible for ensuring that solicitors appropriately registered with the state (where applicable). Administrative Personnel. Care should be taken with administrative and other personnel who have contact with clients to make sure that their activities do not require them to register as IARs Dual Licensing In some cases a person registered as an IAR of PICI may also be registered as a registered representative (RR) of a registered broker dealer or as an IAR with another investment adviser. The laws of most states treat this as a dual registration requiring the consent of both companies and, in the case of some states, the consent of the state securities regulator. Some states strictly prohibit dual registration except when the companies with whom the person is

14 registered are affiliated. PICI will check applicable state laws to make sure rules pertaining to dual registration are being followed. Generally, PICI does not permit dual registrations. FINRA Registered Representatives. Special rules apply to individuals who are registered representatives of FINRA broker dealer firms and seek IAR registration with PICI. According to FINRA requirements (Notice to Members 94-44), IARs who are also registered with a FINRA member are required to inform the member firm in writing that they are registered as, or affiliated with, an investment advisor. Written notice and approval must be given by the member firm to their representatives who are also registered as investment advisers and such firms must supervise all advisory activities of those representatives in which the representative is participating in securities transactions for advisory clients. Other Licenses. Similarly, persons registered as IARs may also hold licenses with other entities to sell insurance related or other products. These licensing requirements should be checked over carefully at the outset to make sure that regulatory requirements are being met. This extends to payment of fees and commissions to the proper entities as well as the licensing/consent issues Hiring and Registration Process The CCO is responsible for obtaining and maintaining required Associated Person or IAR registration of personnel. At the time of application for employment, PICI will obtain at least the following for each person required to register: A. Application for Employment (includes authorizations) B. Reference checks (as needed) C. Personnel Questionnaire D. CRD/IARD record (if any). PICI may require additional documents at any time Annual Personnel Review The CCO is responsible for an annual review of each Associated Person or IAR contracted with PICI. The annual review may include any of the following: A. Ascertaining that applicable license information is current and that all licenses have been renewed; B. Review of qualifications/responsibilities to determine if changes/upgrades are necessary; C. Review of specific education, training and compliance issues; and/or D. Review of activities related to business conducted outside PICI and personal securities accounts. E. Other items as relevant to the individual

15 1.6 Correspondence Review Business Correspondence to or from PICI or any of its Associated Persons (associates or full time independent contractors) is subject to review by PICI. Business Correspondence is correspondence relating to (but not necessarily limited to) the following topics: Recommendations and other advice given or proposed to be given. The adviser must retain a memorandum describing any list (and the source thereof) of names and addresses of persons to whom offers of any report, analysis, publication or other investment advisory service were sent where the material was actually sent to the persons on that list. Instructions received from clients. Receipt, disbursement or delivery of funds or securities. Placing or execution of any order to purchase or sell any security. PICI requires that each Associated Person certify that they will not conduct any Business Correspondence otherwise than through PICI and will use only the PICI system for any electronic Business Correspondence. PICI requires that all outgoing Business Correspondence, including direct communications to clients, form letters and sales literature, memos, notes, etc. must be reviewed and approved in advance in writing by the appropriate supervisor. The person sending out any form letter or advertising must maintain a list of the addressees and the date(s) the material was disseminated. Copies of this correspondence should be initialed by the supervisor indicating review and be placed either in the client file or in an outgoing correspondence file. Similarly PICI requires all incoming correspondence of any kind, including personal letters addressed to Associated Persons, to be opened and reviewed by the appropriate supervisor before being distributed to the Associated Person. This review should focus particularly on the receipt of funds of securities by Associated Persons and on any customer dissatisfaction or complaints Review The SEC treats s like other Business Correspondence. PICI must review both incoming and outgoing s on a regular basis. The Home Office supervisors and OSJ supervisors will review incoming and outgoing correspondence via the web based monitoring system, Smarsh Technologies. Evidence of review is indicated electronically within the monitoring system and additionally noted manually on supervisory logs. Where review indicates a problem, the supervisor will immediately take it up with the person involved, or the Chief Compliance Officer where warranted, in order to correct it, including sending corrective communications where appropriate. In certain situations, firms can assert attorney-client privilege with respect to certain s which qualify for such protection to protect them from regulatory, legal or other scrutiny. In such situations, the firm will mark such communications as privileged within the monitoring system and maintain a privilege log which documents any such s which the firm wishes to protect under the privilege rules. The log must not only list the s to be protected but also document sufficient reasoning for invoking such privilege. Regulators seeking access to such documentation may challenge the assertion of privilege with respect to any s in question. Typically, if the CCO is also the firm s Chief Legal Counsel, they cannot assert blanket privilege with respect to compliance related s without appropriate justification

16 The Home Office is responsible for periodically reviewing all as described above. Reviewed s are stored electronically within the monitoring system and noted on the supervisory log with any applicable documentation pertaining to any additional inquiry or investigation, including any remedial action taken, as a result of the review. The Home Office will be responsible for prompt retrieval of any pursuant to regulatory requests. PICI strictly prohibits communication with customers via instant messaging technology, unauthorized firm presence on social media and solicitation via social media. Discovery of such communication will result in disciplinary action. 1.8 Disciplinary Actions PICI takes its responsibilities seriously to review associate activities to detect and deter conduct which is, or could become, a violation of these Procedures. All associates are required to report any suspected violations of these Procedures to the Chief Compliance Officer. Associates should know that they may be asked to explain, informally or otherwise, their conduct or documentation with which they are associated. If further investigation reveals a problem PICI may take further action, including placing the individual(s) involved under heightened supervision or restrictions, fine, imposing internal penalties, including canceling an improper associate securities trade disgorgement of ill-gotten profits or, in extreme cases, suspension or dismissal. In certain cases the existence of violations may need to be disclosed to the SEC and/or state authorities with the consequent requirement that Form ADV be amended as well as the CRD/IARD registrations on Form U-4 of the individuals involved. Corrective action may, in addition, involve unwinding improper client trades and other remedial action to make the client whole. SECTION 2: FILINGS AND DISCLOSURE TO CLIENTS; THE CLIENT AGREEMENT 2.1 Investment Adviser (RIA) Registration and Reporting Form ADV Filing and Updating The CCO or his designee is responsible for obtaining and maintaining RIA registration for PICI. Registration is accomplished by filing SEC Form ADV, a copy of which can be found, together with filing instructions, on the sec website, State filings employ Form ADV as well and their forms and instructions can be found on their various websites (see the NASAA website, for the names and addresses of the state regulators). Criteria for Registration. Advisers must register with either the SEC or applicable state based on the following criteria: SEC Registration is required if the adviser: 1. Has $30 million or more in securities portfolios (see below) for which the adviser provides continuous and regular supervisory or management services (registration is optional if adviser has $25 million). 2. Is adviser to a registered investment company under the Investment Company Act of 1940;or

17 3. Is providing services in 30 or more states. As PICI currently has assets under management in excess of $25/$30 million, it has registered with the SEC. Securities Portfolios. Under the SEC regulations the securities portfolios for which an investment adviser provides continuous and regular supervisory or management services are defined in Section 203A(a)(2) of the Advisers Act. Securities portfolios are defined as accounts which derive at least 50% of their total value from securities. For purpose of this section, advisers can count cash and cash equivalents as securities. The adviser may also count as securities portfolios family and proprietary accounts, accounts for which the adviser does not collect a fee, and non-u.s. resident accounts. The instructions to Form ADV currently state that a portfolio receives continuous and regular supervisory or management services if the adviser has discretionary authority and provides ongoing supervisory or management services. Non-discretionary accounts may meet this requirement if they have been assigned other responsibilities typically associated with a discretionary account, e.g., selecting or making recommendations as to specific securities or other investments and arranging for trade execution. Generally, advisors should not count client assets for the purposes of calculating assets under management if: The adviser allocates assets among other investment managers, unless the adviser has discretionary authority to hire and fire that manager; The adviser does not provide ongoing supervision and management of the account (i.e. reviews the client account only periodically); or The adviser provides advice about a client s account but does not arrange the client s securities transactions (financial planning and consulting activities). State Notice Filings. The National Securities Markets Improvements Act of 1996 (NSMIA) divided regulation of investment advisers between the Securities and Exchange Commission (SEC) and state securities authorities. In general, under NSMIA, a state cannot require the registration, licensing, or qualification of an investment adviser registered with the SEC. However, NSMIA does allow States to require, for notice purposes, that SEC-registered investment advisers file with the States any document that the adviser files with the SEC. Investment advisers registered with the SEC are generally required to provide states with a copy of Form ADV and any amendments filed with the SEC. These filings are called notice filings and are performed on the IARD system. PICI is registered with the SEC and made proper notice filings with any states where advisory services are offered and such notice filings are required. Electronic Filing. Form ADV is in two parts. Part I contains general information about the adviser and is filed electronically with the SEC through the Investment Adviser Registration Depository (IARD) System. Instructions for this filing require the registrant to log on the SEC website ( obtain an IARD registration number and pay a filing fee. Part II is not currently filed with the SEC. Part II is a disclosure document containing information designed to be given to potential clients. Most states require that both Part I and Part II be filed

18 IARD information is available to the public on the Investment Adviser Public Disclosure ( IARD ) website ( The IARD Users Manual ( is available for specifics and personal help can be obtained by calling the IARD help desk at (240) Adviser Registration of Hedge Fund Managers. The SEC in January, 2005 adopted a massive new regulation requiring individuals and firms that manage hedge funds to be registered advisers by February 1, This was done by removing an exception contained in a rule adopted in This had treated a corporation, limited partnership, Limited Liability Company or other similar entity as a single client. The new Rule forces hedge fund managers to count all the investors in the entity toward the threshold of 14 clients to meet the private advisor exemption from registration afforded by Section 203 of the Act. SEC Release No IA 2333, by adding new Rule 203(b)(3)-2 to the Advisers Act Rules, creates a new category of private fund and states that all shareholders, limited partners, members or beneficiaries of a private fund are now counted as clients of the adviser to that fund. Further information about these requirements can be found in Section 7, Particular Products and Services. State Registration: PICI is registered with the SEC and therefore is required only to notice file with any states in which it conducts business, as required by the Adviser s Act. Branch Offices: Certain states require registration of all branch offices of an investment adviser. Depending on the jurisdiction, these filings may either be done in electronic format by filing Form BR through the FINRA s CRD/IARD system or via paper filings. In addition, notification of the establishment of a branch or termination of a branch (in addition to amending Schedule D of Form ADV Part I) is a requirement in a number of states. Notification is required within specific timeframes regarding opening or closing branch offices. Definitions of "branch office" vary from state to state, so if PICI employs advisory person(s) outside the main office location it will review each state s branch office definition and registration requirements. PICI has verified the regulations within each state where it conducts advisory business and has registered branch offices and made appropriate filings, as applicable to each state. Annual ADV Updating Amendment. An Annual Updating Amendment to Form ADV Part I must be filed with the SEC and with any state which requires it, together with the required filing fees, within ninety (90) days of the end of each fiscal year. SEC and state registered advisers filed on IARD are required to amend Form ADV Part I electronically on IARD which now contains the eligibility information, formerly required by the annual Schedule I filing, for both new advisers applying for SEC registration and existing SEC advisers. Form ADV Part II or disclosure brochure amendments do not currently have to be filed with the SEC but may be required electronically or in writing in state jurisdictions where the firm is either a SEC registered adviser and must make notice filing(s) or is registered or has a registration application pending. State requirements vary as they phase into IARD. In situations where an adviser crosses the $30 million threshold as part of the annual amendment process, the firm will have 90 days from the filing of the annual amendment to transition their registration to SEC status. Conversely, SEC registered advisers who fall below the $25 million threshold as a result of their annual amendment filing must immediately commence their filing for state registration status in all jurisdictions where registration will be required

19 Prompt Form ADV Amendment is required for: Part I Any changes in Items 1, 3, 9 or 11 of Part IA or Items 1, 2.A through 2.F or 2.1 of Part 1B. Part I Material changes in Items 4, 8 or 10 of Part 1A, Item 2G of Part 1B Part II Material Changes as required by the state where registered. The CCO or his designee is responsible for making timely updates to PICI s Form ADV Part I and II as described above Form ADV - E Form ADV-E must be completed by investment advisers who possess (directly or indirectly) or have custody of client funds or securities. The ADV-E must be completed by the investment adviser and then given to an independent public accountant who examines client funds and securities in the custody or possession of the investment adviser. The accountant then submits the ADV-E along with the certificate of accounting required under Rule 206(4)-2(a)(5) of the Advisers Act to the SEC and applicable state regulators. Two copies should be filed with the SEC's principal office in Washington, DC and another copy with the appropriate SEC Regional Office. Other copies may be submitted to appropriate state regulators, as applicable. Since PICI does not have custody of client funds and/or securities, it is not required to file Form ADV-E Form ADV-W Form ADV-W is used to withdraw registration as an investment adviser with the SEC and states. SEC and state registered advisers must Form ADV-W filings electronically on the IARD system. Advisers may make either a Full Withdrawal, which terminates their registration with all regulators, or a Partial Withdrawal, which terminates registrations with certain, but not all, regulators; i.e., deleting state notice filings, state registration(s), or converting from/to SEC or state registration Form U-4 Advisory representatives must inform the CCO or his designee of all changes which may require an amendment to Form U-4. Typically, this will be a change of home address, a married name (versus a maiden name), outside business activity, and any disciplinary matter Form 13-D SEC Rule 13d-2 requires this schedule to be filed for any person, including the adviser and its Associated Persons, who, after acquiring directly or indirectly a beneficial ownership of more than 5 percent of the outstanding shares of any equity security of a class registered pursuant to Section 12 of the Securities Exchange Act or any equity security of an insurance company relying on Section 12(g)(2)(G) or any closed-end investment company registered under the 1940 Act to report beneficial ownership with either the intent or effect of causing a change in control of an issuer. The Form must be filed within 10 days after such acquisition with (1) the SEC, (2) each exchange

20 where the security is traded, and with (3) the principal office of the issuer. Form 13D must be filed on the SEC s EDGAR Filing System. PICI is not currently required to make FORM 13D filings as outlined above. Should these filings be required, the CCO or his designee is responsible for ensuring the filings occur on a timely basis Form 13-G Form 13-G may be filed in lieu of a Schedule 13-D if such person has acquired more than 5% of the outstanding shares of a security in the ordinary course of business and not with purpose of changing or influencing control of the issuer and such person is a registered investment adviser or a specified type of institutional investor [Rule 13d-1(b)(1)(ii)(E)] under the Securities Exchange Act. Form 13-G must be filed within 45 days after end of calendar year in which the obligation arose and following each year end thereafter to report a change in position as long as the person continues to own a five percent position or more. The Form need not be filed if the person does not own more than 5 percent at the end of the calendar year. If the person no longer holds such securities in the ordinary course of its business, and now holds it with the intent or effect of causing a change in control of the issuer, the person must promptly file a Form 13-D. An initial or amended filing is required within 10 days of the end of any month in which the person acquires more than 10% of the outstanding shares of an issuer or if a reportable position increases or decreases by more than 5%. Form 13-G must be filed on the SEC s EDGAR Filing System. PICI is not currently required to make FORM 13G filings as outlined above. Should these filings be required, the CCO or his designee is responsible for ensuring the filings occur on a timely basis Form 13-F This form must be filed electronically on the SEC EDGAR system by an institutional investment manager that exercises investment discretion with respect to accounts holding exchange traded or NASDAQ quoted equity securities having an aggregate fair market value of at least $100 million on the last trading day of any month. Any person subject to this provision must initially file within 45 days after the last day of the year in which $100 million is obtained and thereafter 45 days after the end of each subsequent quarter. Once an adviser is obligated to make a 13-F filing the adviser must continue to make quarterly filings for as long as the adviser continues to manage $100 million of the equity securities on a discretionary basis. PICI is not currently required to make FORM 13F filings as outlined above. Should these filings be required, the CCO or his designee is responsible for ensuring the filings occur on a timely basis. 2.2 State Requirements; Net Capital and Bonding Not applicable 2.3 Disclosure to Clients The following sections deal with required disclosures to clients. Many of the disclosures required below can be accomplished by electronic means with the client s prior written consent, a copy of which must be retained in the client s records

21 2.3.1 Risk Disclosure In managing or overseeing a portfolio of client assets, PICI and its associates should exercise great care to make sure that the client is aware of the specific risks of each distinct investment practice that will be used to a significant degree. This is best accomplished by a clear, concise explanation of the various risks in written format which requires client to sign or otherwise acknowledge receipt and understanding Financial and Disciplinary Disclosure Rule 206-4(4) requires that an adviser promptly disclose to clients and prospective clients: A financial condition that is reasonably likely to impair the ability of the adviser to meet contractual commitments to clients. A legal or disciplinary event that is material to an evaluation of the adviser s integrity or ability to meet contractual commitments to clients. For Existing Clients: This disclosure must be made by an or written communication. For New Clients: This disclosure may be included in the brochure provided to clients or prospects and in any case must be made promptly to clients and to prospects at least 48 hours before entering into any contract (or the time of entering into the contract if the client can terminate without penalty within five business days). Financial Condition. The Rule requires this disclosure in each case where the adviser has discretionary authority (express or implied) or custody over client funds or securities or requires prepayment of advisory fees of more than $500 from each client 6 months or more in advance. PICI would under these circumstances be required to make such disclosure. Legal or Disciplinary Event. The Rule requires advance disclosure of any of the following events involving the adviser or a Management Person: Criminal or civil conviction in which the adviser or Management Person (a) was convicted or pleaded nolo contendere to a felony or misdemeanor or is the named subject of pending criminal proceeding and such action involved an investmentrelated business fraud, false statements or omissions, wrongful taking of property or bribery, forgery, counterfeiting or extortion or (b) was found to have been involved in a violation of an investment-related statute or regulation or (c) was the subject of any order, judgment or decree permanently or temporarily enjoining or otherwise limiting the adviser or Management Person from engaging in any investment-related activity; Administrative proceedings before the SEC or other agency in which such adviser or Management Person was (a) found to have caused an investment-related business to lose its authorization to do business or (b) was found to have been involved in a violation of an investment-related statute or regulation and was the subject of an order by the agency denying, suspending or revoking the authorization of the adviser or Person to act, or barring or suspending the adviser or Person s association with, an investment related business or otherwise significantly limiting the adviser or Person s investment-related activities; or Self-regulatory organization proceedings in which the adviser or Person was found to have been involved in a violation of the rules and was barred or suspended from

22 membership or fining the adviser or Person more than $2,500 or otherwise significantly limiting the adviser s or Person s investment activities. A Management Person is any person with the power to exercise, directly or indirectly, a controlling influence over the management or policies of the adviser or to determine the investment advice given to clients. CCO or his designee is responsible for ensuring PICI is in compliance with the disclosure and notification provisions of Rule 206(4)-4. Existing clients will receive such notification via or regular mail. 2.4 The Brochure Rule Rule requires that at or prior to the time the prospective client signs an agreement for advisory services the adviser must provide the prospective client with a brochure. This may be Part II of Form ADV or a document containing at least the information required by Form ADV Part II. Many advisers choose to prepare this alternative document with text, charts and other graphics to aid in the selling effort. PICI is required by Rule to maintain a record of delivery of Form ADV Part II before the client signs the contract, together with a client receipt. PICI currently does not utilize a separate brochure in lieu of Form ADV Part II to provide disclosure to clients. The contents of the brochure are subject to overall advertising restrictions on exaggerated claims, testimonials, non-balanced presentation and, most importantly, presentations of prior investment performance. See Section 6: Sales and Advertising. If the brochure is not delivered at least forty eight (48) hours before the client enters into the contract, then the client has the right to terminate the contract within five (5) business days after entering into it. Annual Offer. The Adviser s Act also requires that an updated Form ADV Part II and or applicable wrap fee brochure be offered without charge to existing clients at least annually. Rule 204-2(a)-14 requires that PICI must (a) provide the notice in a quarterly report or separate communication which can be archived (b) maintain a request log identifying the clients, date of request and date filled and (c) fill the request within seven (7) days. Applicable principal as designated by the CCO is responsible for ensuring that PICI conducts its annual offer as required by the rule and maintains all required books and records pursuant to the annual offer. PICI is required by Rule to maintain a record of delivery of Form ADV Part II before the client signs a contract, together with a client receipt. This list will be maintained by applicable principal as designated by the CCO Wrap Fee Programs A wrap fee program is formally defined as any program under which a client is charged a specific fee not based directly on transactions in a client's account for investment advisory services and execution of client transactions. Sponsors of wrap fee programs must provide

23 clients with a wrap account brochure. The wrap account brochure may also combine other disclosures required by Part II ADV into one disclosure document. The Rules provide an exemption for (a) asset allocation programs which invest exclusively in mutual funds and (b) managed account programs in which clients are provided with advice about portfolio managers. PICI s programs to date DO NOT FALL within the exemption. While a number of programs now do not specialize exclusively in mutual funds, the fees are not wrapped in that the client pays separately for custodial, clearing and execution services. Should PICI initiate a wrap program it will amend its Form ADV to reflect this activity and will implement policies and procedures to insure that the wrap account brochure is delivered to clients at or prior to the time of signing. 2.5 The Client Agreement Every contract for advisory services signed by PICI must contain certain provisions, as follows: Mandated by the Advisers Act of 1940 and Related Rules Contract cannot be assigned without client consent (NOTE: assignment includes a transfer of control of the adviser). No fees based on a percentage of capital gains or appreciation in the portfolio (with certain exceptions). Where prepaid fees are charged, the contract must clearly state that the client gets a pro-rata refund if the contract is terminated before the end of the relevant period. No provisions waiving compliance with the Act Contact must be in writing (including all material provisions of the arrangement). Where the adviser is a partnership or limited liability company it will notify the other party to the contract of any change in the membership of such partnership or Limited Liability Company within a reasonable time after such change. Where solicitation fees are being paid the contract must refer to this fact and be accompanied by a Disclosure Statement to be signed by the customer. Limitations of Liability Clauses. Many states object to limitation of liability clauses in client agreements. State securities regulators often require registered advisers to include a provision that any such limitation of liability does not constitute a waiver of any rights a client would otherwise have under federal or state securities laws. Mandatory Arbitration Clauses. Similarly, if there is a mandatory arbitration clause many states require that the clause include a statement that the client is not waiving any rights provided under federal or state securities laws to pursue remedies by other means Other Suggested Provisions Scope of authority should be clearly spelled out, including nature of discretion, investment guidelines or restrictions, etc. Acknowledgment of fiduciary duties (required for ERISA plan fiduciaries ) limited to actual assets managed by the fiduciary