Under Section 509(5) of the Michigan Uniform Securities Act, “[a] person acting as an investment adviser or investment adviser representative that provides investment advice for compensation in violation of section 403(1), 404(1), or 506 [of the Act] is liable to the client.” MCL 451.2509(5).

Unregistered Investment Advisor

Section 403(1) of the Act states that “[a] person shall not transact business in this state as an investment adviser unless the person is registered under this act as an investment adviser or is exempt from registration as an investment adviser under [Section 401(2)]. MCL 451.2403(1).

The term “investment adviser” is defined in pertinent part as follows:

[A] person that, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or the advisability of investing in, purchasing, or selling securities or that, for compensation and as a part of a regular business, issues or promulgates analyses or reports concerning securities. The term includes a financial planner or other person that, as an integral component of other financially related services, provides investment advice to others for compensation as part of a business or that holds itself out as providing investment advice to others for compensation. The term does not include any of the following: (i) An investment adviser representative. . . . .

MCL 451.2102. The definition of “investment advisor” also specifically excludes broker-dealers whose performance of investment advice is solely incidental to the conduct of business as a broker-dealer, and who do not receive special compensation for their investment advice.

Unregistered Investment Advisor Representative

Section 404(1) of the Act states that “[a]n individual shall not transact business in this state as an investment adviser representative unless the individual is registered under this act as an investment adviser representative or is exempt from registration as an investment adviser representative under [Section 404(2)]. MCL 451.2404(1).

The term “investment adviser representative” is defined in pertinent part as follows:

[A]n individual employed by or associated with an investment adviser or federal covered investment adviser and who makes any recommendations or otherwise gives investment advice regarding securities, manages accounts or portfolios of clients, determines which recommendation or advice regarding securities should be given, provides investment advice or holds himself or herself out as providing investment advice, receives compensation to solicit, offer, or negotiate for the sale of or for selling investment advice, or supervises employees who perform any of the foregoing.

The Act contains the following exclusion from the definition of investment advisor:

(iii) [A person who] Is employed by or associated with a federal covered investment adviser, unless the individual meets any of the following:

(A) Has a “place of business” in this state as that term is defined by rule adopted under section 203A of the investment advisers act of 1940, 15 USC 80b-3a, and is an “investment adviser representative” as that term is defined by rule adopted under section 203A of the investment advisers act of 1940, 15 USC 80b-3a.

(B) Has a “place of business” in this state as that term is defined by rule adopted under section 203A of the investment advisers act of 1940, 15 USC 80b-3a, and is not a “supervised person” as that term is defined in section 202(a)(25) of the investment advisers act of 1940, 15 USC 80b-2. . . .

In order for the exclusion to apply, two elements have to be met. First, the advisor would have to show that he was employed by or associated with a federal covered investment adviser. Second, the advisor would have to establish that (a) under the definition of “place of business” set forth in 17 CFR 275.203A-3(b), she did not have a place of business in Michigan, and (b) either that she was not an “investment adviser representative” as that term is defined under 17 CFR 275.203A-3(a), or alternatively, that she was a “supervised person” under 15 U.S.C. § 80b-2(a)(25).

The definition of “place of business” under 17 CFR 275.203A-3(b) includes “[a]n office at which the investment adviser representative regularly provides investment advisory services, solicits, meets with, or otherwise communicates with clients.”

The term “investment advisor representative” is defined under 17 CFR 275.203A-3(a) as follows:

[A] supervised person of [an] investment adviser:

(i) Who has more than five clients who are natural persons (other than excepted persons described in paragraph (a)(3)(i) of this section); and

(ii) More than ten percent of whose clients are natural persons (other than excepted persons described in paragraph (a)(3)(i) of this section).

(2) Notwithstanding paragraph (a)(1) of this section, a supervised person is not an investment adviser representative if the supervised person:

(i) Does not on a regular basis solicit, meet with, or otherwise communicate with clients of the investment adviser; or

(ii) Provides only impersonal investment advice.

(3) For purposes of this section:

(i) “Excepted person” means a natural person who is a qualified client as described in § 275.205-3(d)(1).

(ii) “Impersonal investment advice” means investment advisory services provided by means of written material or oral statements that do not purport to meet the objectives or needs of specific individuals or accounts.

A “supervised person” is defined under 15 USC 80b-2(a)(25) as “any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of an investment adviser, or other person who provides investment advice on behalf of the investment adviser and is subject to the supervision and control of the investment adviser.”

Damages

In an action under Section 509(5), “[t]he client may . . . recover the consideration paid for the advice, interest at 6% from the date of payment, costs, and reasonable attorney fees determined by the court.” MCL 451.2509(2), (5).

A person is barred from bringing an action under Section 509(5) if the action is not commenced within 1 year after the violation occurred. MCL 451.2509(10).