Fraud and Deceit in Advisory Activities (USA Section 102)
Now that you understand the universal antifraud rule (Section 101), let's look at the companion provision that specifically targets investment advisers and anyone who receives compensation for securities advice.
Advisory Antifraud Provisions (Section 102(a))
Uniform Securities Act (USA) Section 102(a) makes it unlawful for any person who receives consideration for advising on the value of securities or their purchase or sale to:
- Employ any device, scheme, or artifice to defraud
- Engage in any act, practice, or course of business which operates as a fraud or deceit
- Acting as principal, knowingly sell to or purchase from a client without disclosing in writing the capacity in which the person is acting and obtaining client consent before completion of the transaction
- Engage in dishonest or unethical practices as the Administrator may define by rule
Like Section 101, there are no exemptions from Section 102's fraud provisions.
Section 101 vs. Section 102
| Feature | Section 101 | Section 102 |
|---|---|---|
| Who it covers | Any person | Persons who receive consideration for advising |
| What it covers | Offers, sales, and purchases | Advisory activities and solicitation |
| Principal trading disclosure | Not specifically addressed | Written disclosure + client consent required |
| Administrator rulemaking | Not included | Administrator may define dishonest practices |
| Exemptions | None | None |
The Principal Trading Requirement
Section 102(a)(3) deserves special attention. When an adviser acts as principal (buying from or selling to a client from the adviser's own inventory):
- The adviser must provide written disclosure of the capacity in which they are acting
- The client must give consent before completion of the transaction
- This is a per-transaction requirement. Blanket consent is not sufficient
Exam Tip: Gotchas
Section 102(a)(3) requires written disclosure and client consent before the transaction is completed. Oral disclosure alone is insufficient. The exam may test whether verbal disclosure satisfies this requirement. It does not. If an adviser tells the client over the phone "I'm selling this from my own account" but does not provide it in writing, the adviser has violated Section 102.
Solicitation of Advisory Clients (Section 102(b))
Section 102(b) covers solicitation, a different phase of the advisory relationship:
- It is unlawful, when soliciting advisory clients, to make any untrue statement of a material fact or to omit a material fact necessary to make statements not misleading
- Section 102(a) covers the rendition of advice (ongoing relationship)
- Section 102(b) covers solicitation (getting new clients)
Together, Sections 102(a) and 102(b) ensure that the antifraud provisions cover the advisory relationship from initial solicitation through ongoing advice.
Exam Tip: Gotchas
- Section 102(a) covers advice; Section 102(b) covers solicitation. Both apply to advisers. A misleading statement to a prospect during solicitation violates 102(b) even before any advisory relationship begins.