This link takes you to a discussion about the legal requirements of an advisory contract.
(a) Compensation, assignment, and partnership-membership provisions
No investment adviser registered or required to be registered with the Commission shall enter into, extend, or renew any investment advisory contract, or in any way perform any investment advisory contract entered into, extended, or renewed on or after November 1, 1940, if such contract—
(1) provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client;
(2) fails to provide, in substance, that no assignment of such contract shall be made by the investment adviser without the consent of the other party to the contract; or
(3) fails to provide, in substance, that the investment adviser, if a partnership, will notify the other party to the contract of any change in the membership of such partnership within a reasonable time after such change.
(b) Compensation prohibition inapplicable to certain compensation computations
Paragraph (1) of subsection (a) of this section shall not—
(1) be construed to prohibit an investment advisory contract which provides for compensation based upon the total value of a fund averaged over a definite period, or as of definite dates, or taken as of a definite date;
(2) apply to an investment advisory contract with—
(A) an investment company registered under the Advisers Act, or
(B) any other person (except a trust, governmental plan, collective trust fund, or separate account referred to in Section 3(c)(11) of the Investment Company Act of 1940), provided that the contract relates to the investment of assets in excess of $1 million, if the contract provides for compensation based on the asset value of the company or fund under management averaged over a specified period and increasing and decreasing proportionately with the investment performance of the company or fund over a specified period in relation to the investment record of an appropriate index of securities prices or such other measure of investment performance as the Commission by rule, regulation, or order may specify;
(3) apply with respect to any investment advisory contract between an investment adviser and a business development company, as defined in this subchapter, if
(A) the compensation provided for in such contract does not exceed 20 per centum of the realized capital gains upon the funds of the business development company over a specified period or as of definite dates, computed net of all realized capital losses and unrealized capital depreciation, and the condition of Section 60(a)(3)(B)(iii) of the Investment Company Act of 1940 is satisfied, and
(B) the business development company does not have outstanding any option, warrant, or right issued pursuant to Section 60 (a)(3)(B) of the Investment Company Act of 1940 and does not have a profit-sharing plan described in Section 56 (n) of the Investment Company Act of 1940;
(4) apply to an investment advisory contract with a company excepted from the definition of an investment company under Section 3 (c)(7) of the Investment Company Act of 1940; or
(5) apply to an investment advisory contract with a person who is not a resident of the United States.
For purposes of paragraph (2) of subsection (b) of this section, the point from which increases and decreases in compensation are measured shall be the fee which is paid or earned when the investment performance of such company or fund is equivalent to that of the index or other measure of performance, and an index of securities prices shall be deemed appropriate unless the Commission by order shall determine otherwise.
(d) “Investment advisory contract” defined
As used in paragraphs (2) and (3) of subsection (a) of this section, “investment advisory contract” means any contract or agreement whereby a person agrees to act as investment adviser to or to manage any investment or trading account of another person other than an investment company registered under subchapter I of this chapter.
(e) Exempt persons and transactions
The Commission, by rule or regulation, upon its own motion, or by order upon application, may conditionally or unconditionally exempt any person or transaction, or any class or classes of persons or transactions, from subsection (a)(1) of this section, if and to the extent that the exemption relates to an investment advisory contract with any person that the Commission determines does not need the protections of subsection (a)(1) of this section, on the basis of such factors as financial sophistication, net worth, knowledge of and experience in financial matters, amount of assets under management, relationship with a registered investment adviser, and such other factors as the Commission determines are consistent with this section. With respect to any factor used in any rule or regulation by the Commission in making a determination under this subsection, if the Commission uses a dollar amount test in connection with such factor, such as a net asset threshold, the Commission shall, by order, not later than 1 year after July 21, 2010, and every 5 years thereafter, adjust for the effects of inflation on such test. Any such adjustment that is not a multiple of $100,000 shall be rounded to the nearest multiple of $100,000.
(f) Authority to restrict mandatory pre-dispute arbitration
The Commission, by rule, may prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any investment adviser to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations thereunder, or the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors.