No. 30595 (Amendment): R628-15. Certification as an Investment Adviser

DAR File No.: 30595
Filed: 10/16/2007, 02:58
Received by: NL

RULE ANALYSIS

Purpose of the rule or reason for the change:

Although audited financials and insurance requirements are required in the "post" certification requirements of this rule, the Securities Division informed the Money Management Council that there is no way to make sure that the financials were being provided, and that insurance was in place after the fact. The Securities Division suggested that it would be best to require the financials and proof of insurance up front.

Summary of the rule or change:

This change moves the post requirements of proof of insurance and audited financials from the "post" requirements section of the rule, and makes them part of the application process to become certified.

State statutory or constitutional authorization for this rule:

Subsections 51-7-3(3), 51-7-18(2)(b)(vi) and (vii), and Section 51-7-11.5

Anticipated cost or savings to:

the state budget:

None--The $500 fee charged covers the cost of having a Securities Division employee review the application already.

local governments:

As the rule applies only to investment advisers and investment adviser representatives, local government is not affected by the change.

small businesses and persons other than businesses:

None--This is not a new requirement. Before this change, the adviser would still have to provide audited financials and proof of insurance before they did business with a public entity so any costs incurred to provide these items up front would still have to be incurred before doing business with a public entity.

Compliance costs for affected persons:

There is no compliance costs for affected persons because this is not a new requirement, it is now required during the certification process. It used to be a post requirement before doing business with public entities.

Comments by the department head on the fiscal impact the rule may have on businesses:

The impact on business from these changes are nominal as the amendment to rule is more clarification and a definition of terms and procedure than operative. Bruce Cohne, Chairman

The full text of this rule may be inspected, during regular business hours, at the Division of Administrative Rules, or at:

Money Management Council
Administration
Room E315 EAST OFFICE BLDG
STATE CAPITOL COMPLEX
PO BOX 142315
SALT LAKE CITY UT 84114-2315

Direct questions regarding this rule to:

Ann Pedroza at the above address, by phone at 801-538-1883, by FAX at 801-538-1465, or by Internet E-mail at [e-mail]

Interested persons may present their views on this rule by submitting written comments to the address above no later than 5:00 p.m. on:

12/17/2007

This rule may become effective on:

12/24/2007

Authorized by:

Bruce B. Cohne, Chair

RULE TEXT

R628. Money Management Council, Administration.

R628-15. Certification as an Investment Adviser.

R628-15-6. Criteria for Certification of an Investment Adviser.

To be certified by the Director as a Certified investment adviser or Investment adviser representative under the Act, an investment adviser or investment adviser representative shall:

A. Submit an application to the Division on Form 628-15 clearly designating:

(1) the investment adviser;

(2) its designated official as defined in R164-4-2 of the Division; and

(3) any investment adviser representative who provides investment advisory services to public treasurers in the state.

B. Provide written evidence of insurance coverage as follows:

(1) fidelity coverage based on the following schedule:

 

TABLE

Utah Public funds

under management          Percent for Bond

           $0 to          10% but not less than

  $25,000,000             $1,000,000



  $25,000,001 to          8% but not less than

  $50,000,000             $2,500,000



  $50,000,001 to          7% but not less than

 $100,000,000             $4,000,000



 $100,000,001 to          5% but not less than

 $500,000,000             $7,000,000



 $500,000,001 to          4% but not less than

 $1.250 billion           $25,000,000



 $1,250,000,001           Not less than

 and higher               $50,000,000

 

(2) errors and omissions coverage equal to five percent (5%) of Utah public funds under management, but not less than $1,000,000 nor more than $10,000,000 per occurrence.

C. Provide to the Division at the time of application or renewal of application, its most recent annual audited financial statements prepared by an independent certified public accountant in accordance with generally accepted accounting principles in accordance with R628-15-8A.

[B]D. Pay to the Division the non-refundable fee described in Section 51-7-18.4(2).

[C]E. Have a current Certificate of Good Standing dated within 30 days of application from the state in which the applicant is incorporated or organized.

[D]F. Have net worth as of its most recent fiscal year-end of not less than $150,000 documented by the financial statements audited according to Subsection R628-15-6(C)[prepared by an independent certified public accountant in accordance with generally accepted accounting principles].

[E]G. Allow the public treasurer to select the forum and method for dispute resolution, whether that forum be arbitration, mediation or litigation in any state or federal court. No agreement, contract, or other document that the applicant requires or intends to require to be signed by the public treasurer to establish an investment advisory relationship shall require or propose to require that any dispute between the applicant and the public treasurer must be submitted to arbitration.

[F]H. Agree to the jurisdiction of the Courts of the State of Utah and applicability of Utah law, where relevant, for litigation of any dispute arising out of transactions between the applicant and the public treasurer.

[G]I. All Investment adviser representatives who have any contact with a public treasurer or its account, must sign and have notarized a statement that the representative:

(1) is familiar with the authorized investments as set forth in the Act and the rules of the Council;

(2) is familiar with the investment objectives of the public treasurer, as set forth in Section 51-7-17(2);

(3) acknowledges, understands, and agrees that all investment transactions conducted for the benefit of the public treasurer must fully comply with all requirements set forth in Section 51-7-7 and that the Certified investment adviser and any Investment adviser representative is prohibited from receiving custody of any public funds or investment securities at any time.

 

R628-15-9. Post Certification Requirements.

A. Certified investment advisers shall notify the Division of any changes to any items or information contained in the original application within 30 calendar days of the change. The notification shall provide copies, where necessary, of relevant documents.

B. Certified investment advisers shall maintain a current application on Form 628-15 with the Division throughout the term of any agreement or contract with any public treasurer. Federal covered advisers shall maintain registration as an investment adviser under the Investment Advisers Act of 1940 throughout the term of any agreement or contract with any public treasurer.

C. Certified investment advisers shall provide and maintain written evidence of insurance coverage as described in R628-15-6(B).[and shall maintain insurance coverage as follows:]

[(1) fidelity coverage based on the following schedule:

 

TABLE

Utah Public funds

under management          Percent for Bond

           $0 to          10% but not less than

  $25,000,000             $1,000,000



  $25,000,001 to          8% but not less than

  $50,000,000             $2,500,000



  $50,000,001 to          7% but not less than

 $100,000,000             $4,000,000



 $100,000,001 to          5% but not less than

 $500,000,000             $7,000,000



 $500,000,001 to          4% but not less than

 $1.250 billion           $25,000,000



 $1,250,000,001           Not less than

 and higher               $50,000,000

 

(2) errors and omissions coverage equal to five percent (5%) of Utah public funds under management, but not less than $1,000,000 nor more than $10,000,000 per occurrence.

]D. Certified investment advisers shall provide to the public treasurer the SEC Form ADV Part II prior to contract execution.

E. Certified investment advisers shall file annual audited financial statements with all public treasurers with whom they are doing business[ and with the Division].

F. Certified investment advisers shall fully disclose all conflicts of interest and all economic interests in certified dealers and other affiliates, consultants and experts used by the Investment adviser in providing investment advisory services.

G. Certified investment advisers shall act with the degree of care, skill, prudence, and diligence that a person having special skills or expertise acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

H. Certified investment advisers shall exercise good faith in allocating transactions to certified dealers in the best interest of the account and in overseeing the completion of transactions and performance of certified dealers used by the Investment adviser in connection with investment advisory services.

I. Certified investment advisers shall fully disclose to the public treasurer any self-dealing with subsidiaries, affiliates or partners of the Investment adviser and any soft dollar benefits to the Investment adviser for transactions placed on behalf of the public treasurer.

J. Certified investment advisers shall fully and completely disclose to all public treasurers with whom they do business the basis for calculation of fees, whether and how fees may be adjusted during the term of any agreement, and any other costs chargeable to the account. If performance-based fees are proposed, the disclosure shall include a clear explanation of the amount of the fee at specific levels of performance and how prior losses are handled in calculation of the performance-based fee.

K. Certified investment advisers shall not assign any contract or agreement with a public treasurer without the written consent of the public treasurer.

L. Certified investment advisers shall provide immediate written notification to any public treasurer to whom advisory services are provided and to the Division upon conviction of any crime involving breach of trust or fiduciary duty or securities law violations.

M. Not less than once each calendar quarter and as often as requested by the public treasurer, Certified investment advisers shall timely deliver to the public treasurer:

(1) copies of all trade confirmations for transactions in the account;

(2) a summary of all transactions completed during the reporting period;

(3) a listing of all securities in the portfolio at the end of each reporting period, the market value and cost of each security, and the credit rating of each security;

(4) performance reports for each reporting period showing the total return on the portfolio as well as the realized rate of return, when applicable, and the net return after calculation of all fees and charges permitted by the agreement; and

(5) a statistical analysis showing the portfolio's weighted average maturity and duration, if applicable, as of the end of each reporting period.

 

KEY: cash management, public investments, securities regulation, investment advisers

Date of Enactment or Last Substantive Amendment: [June 21, 2007]2007

Authorizing, and Implemented or Interpreted Law: 51-7-3(3); 51-7-18(2)(b)(vi); 51-7-18(2)(b)(vii); 51-7-11.5(2)(b); 51-7-11.5(2)(c)