No. 27136 (New Rule): R628-15. Certification as an Investment Adviser

DAR File No.: 27136
Filed: 04/30/2004, 04:26
Received by: NL

 

RULE ANALYSIS

Purpose of the rule or reason for the change:

The purpose of this rule is to establish a uniform standard to evaluate the financial condition and the standing of an investment adviser to determine if investment transactions with public treasurers by investment advisers would expose public funds to undue risk.

 

Summary of the rule or change:

This rule requires that an investment adviser who intends to provide investment advisory services to a public treasurer become certified. It provides for the application process and the information required from the investment adviser to become certified. The rule requires that investment advisers renew their certification annually and contains post certification requirements. It provides qualification criteria for the use of non-certified broker/dealers by investment advisers. The rule requires that the Money Management Council mail the list of certified investment advisers out to public treasurers at least semi-annually. The rule also provides grounds and procedures for denial, suspension, and termination of status as a certified investment adviser.

 

State statutory or constitutional authorization for this rule:

Subsections 51-7-3(3) and 51-7-3(10), and Section 51-7-18

 

Anticipated cost or savings to:

the state budget:

The fee for certification is $500 per each firm. It is not known how many investment advisers will become certified. Using the certified dealers list as an example, the fee process could generate up to $10,000 annually. Currently, the Council is aware of five investment advisory firms that will become certified.

 

local governments:

The local public treasurers will not have any costs associated with this rule. If they choose to utilize investment advisers to manage their money, any fees paid should in theory, be offset by earnings on those funds under management.

 

other persons:

A non-licensed investment adviser would have a minimal $30 annual fee to become licensed. The certified investment adviser fee is $500 annually, these fees would be offset by potential income from managing public funds.

 

Compliance costs for affected persons:

For those firms and individuals not already licensed with the Division of Securities, an annual $30 fee is required. If an individual does not have a NASD Series 65, or Series 66 and Series 7 license, they will have to obtain that license at a one-time cost of $110 for either the Series 65 or 66, and $200 for the Series 7. The firm will then have an annual cost of $500 to become certified under the Rules of the Money Management Council.

 

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

Investment advisers seeking certification must pay a $500 annual certification fee established by Section 51-7-18.4. Compliance with this rule requires certified investment advisers to provide copies of certain documents and to give notices which may result in nominal, incremental costs for duplication and delivery. Federal covered investment advisers may incur additional legal fees and other administrative and registration costs as a result of the requirement for licensing in Utah.

 

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:

06/14/2004

 

This rule may become effective on:

06/15/2004

 

Authorized by:

Larry Richardson, Chair

 

 

RULE TEXT

R628. Money Management Council, Administration.

R628-15. Certification as an Investment Adviser.

R628-15-1. Authority.

This rule is issued pursuant to Sections 51-7-3(3), 51-7-3(10), and 51-7-18.

 

R628-15-2. Scope.

This rule establishes the criteria applicable to all investment advisers and investment adviser representatives for certification by the Director as eligible to provide advisory services to public treasurers under the State Money Management Act (the "Act"). It further establishes the application contents and procedures, and the criteria and the procedures for denial, suspension, termination and reinstatement of certification. Additionally, the qualification of non-certified dealers and the use of these qualified dealers by certified investment advisers is provided for.

 

R628-15-3. Purpose.

This rule establishes a uniform standard to evaluate the financial condition and the standing of an investment adviser to determine if investment transactions with public treasurers by investment advisers would expose public funds to undue risk.

 

R628-15-4. Definitions.

A. The following terms are defined in Section 51-7-3 of the Act, and when used in this rule, have the same meaning as in the Act:

1. "Certified investment adviser";

2. "Council";

3. "Director";

4. "Public treasurer"; and

5. "Investment adviser representative".

B. For purposes of this rule the following terms are defined:

1. "Investment adviser" means either a federal covered adviser as defined in Section 61-1-13 or an investment adviser as defined in Section 61-1-13.

2. "Qualified dealer" means a non-certified broker/dealer that is licensed by the Division and is qualified by the Council to conduct investment transactions on behalf of a public treasurer pursuant to an investment adviser contract not inconsistent with the Act or Rules of the Council between the public treasurer and a certified investment adviser.

 

R628-15-5. General Rule.

Before an investment adviser or investment adviser representative provides investment advisory services to any public treasurer, the investment adviser or investment adviser representative must submit and receive approval of an application to the Division, pay to the Division a non-refundable fee as described in Section 51-7-18.4(2), and become a Certified investment adviser or Investment adviser representative under the Act.

 

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 and pay to the Division the non-refundable fee described in Section 51-7-18.4(2).

B. Be licensed with the Division under its laws and rules, effective as of the date of the application. Licensing is required for all of the following:

(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. C. 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. Have net worth as of its most recent fiscal year-end of not less than $150,000 documented by financial statements prepared by an independent certified public accountant in accordance with generally accepted accounting principles.

E. Have surety bond coverage of not less that fifteen percent (15%) of assets under management as of the date of application.

F. 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 open or maintain an account shall require or propose to require that any dispute between the applicant and the public treasurer must be submitted to arbitration.

G. 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.

H. 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 are required to be settled on a delivery vs. payment basis only at the treasurer's safekeeping bank 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.

 

R628-15-7. Certification.

A. The initial application for certification must be received on or before the last day of the month for approval at the following month's Council meeting.

B. All certifications shall be effective upon acceptance by the Council.

C. All certifications not otherwise terminated shall expire on June 30 of each year, unless renewed. Renewal applications must be received on or before April 30 of each year.

 

R628-15-8. Renewal of Application.

A. Certified investment advisers shall apply annually, on or before April 30 of each year, for certification to be effective July 1 of each year.

B. The application must contain all of the documents and meet all of the requirements as set forth above with respect to initial applications.

C. The application must be accompanied by an annual certification fee as described in section 51-7-18.4(2).

 

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 licensing with the Division and 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 to the public treasurer the SEC Form ADV Part II prior to contract execution.

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

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

F. 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.

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

H. 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.

I. 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.

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

K. 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.

L. 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 accrual basis return 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 as of the end of each reporting period.

 

R628-15-10. Notification of Certification.

The Director shall provide a list of Certified investment advisers and Investment adviser representatives to the Council at least semiannually. The Council shall mail this list to each public treasurer.

 

R628-15-11. Criteria for Qualification of a Non-Certified Dealer.

A. Before a Certified investment adviser uses a non-certified dealer to conduct investment transactions on behalf of a public treasurer, the investment adviser must submit an application for each non-certified dealer for qualification by the Division.

B. The application must include:

(1) Proof of licensing with the Division under its laws and rules, effective as of the date of the application, of the following:

(a) the broker-dealer;

(b) any agents of a firm doing business in the state.

(2) A Certificate of Good Standing, obtained from the state in which the applicant is incorporated or organized.

(3) With respect to applicants who are not primary reporting dealers, financial statements, prepared by an independent certified public accountant in accordance with generally accepted accounting principles, indicating that the applicant has, as of its most recent fiscal year end:

(a) Minimum net capital, as calculated under rule 15c3-1 of the Securities and Exchange Act of 1934 (17 CFR 240.15c3-1(2004)), of at least 5% of the applicant's aggregate debt balances, as defined in the rule, and;

(b) Total capital as follows:

(i) of at least $10 million or;

(ii) of at least $25 million, calculated on a consolidated basis, with respect to an applicant which is a wholly-owned subsidiary.

 

R628-15-12. Grounds for Denial, Suspension or Termination of Status as a Certified Investment Adviser.

Any of the following constitutes grounds for denial, suspension, or termination of status as a Certified investment adviser:

A. Denial, suspension or termination of the Certified investment adviser's license by the Division.

B. Failure to maintain a license with the Division by the firm or any of its Investment adviser representatives conducting investment transactions with a public treasurer.

C. Failure to maintain the required minimum net worth and the required surety bond.

D. Requiring the public treasurer to sign any documents, contracts, or agreements which require that disputes be submitted to mandatory arbitration.

E. Failure to pay the annual certification fee.

F. Making any false statement or filing any false report with the Division.

G. Failure to comply with any requirement of section R628-15-9.

H. Engaging in any act in violation of the Act or Rules of the Council.

I. Failure to respond to requests for information from the Division or the Council within 15 days after receipt of a request for information.

J. Engaging in a dishonest or unethical practice. "Dishonest or unethical practice" includes but is not limited to those acts and practices enumerated in Rule R164-6-1g.

K. Being the subject of:

(1) an adjudication or determination, within the past five years by a securities or commodities agency or administrator of another state, Canadian province or territory, or a court of competent jurisdiction that the person has willfully violated the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940, the Commodity Exchange Act, or the securities or commodities law of any other state; or

(2) an order entered within the past five years by the securities administrator of any state or Canadian province or territory or by the Securities and Exchange Commission denying or revoking license as a broker-dealer, agent, investment adviser, or investment adviser representative or the substantial equivalent of those terms or is the subject of an order of the Securities and Exchange Commission suspending or expelling the person from a national securities exchange or national securities association registered under the Securities Exchange Act of 1934, or is the subject of a United States post office fraud order.

 

R628-15-13. Procedures for Denial, Suspension, or Termination and Reinstatement of Status.

A. Where it appears to the Division or to the Council that grounds may exist to deny, suspend, or terminate status as a Certified investment adviser, the Council shall proceed under the Utah Administrative Procedures Act, Chapter 46b, Title 63 ("UAPA").

B. All proceedings to suspend a Certified investment adviser or to terminate status as a certified investment adviser are designated as informal proceedings under ("UAPA").

C. In any hearings held, the Chair of the Council shall be the presiding officer, and that person may act as the hearing officer, or may designate another person from the Council or the Division to be the hearing officer. At the close of the hearing, other members of the Council may make recommendations to the hearing officer after the close of the hearing.

D. The Notice of Agency Action as set forth under UAPA, or any petition filed in connection with it, shall include a statement of the grounds for termination, and the remedies required to cure the violation.

E. After the date of service of the Notice of Agency Action, the Certified investment adviser and its Investment adviser representatives shall not conduct any investment transaction with any public treasurer if so ordered by the Money Management Council. The order issued by the hearing officer on behalf of the Council at the conclusion of the proceedings shall lift this prohibition if the order allows the Certified investment adviser to keep its status as a Certified investment adviser.

 

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

2004

51-7-3(1)

51-7-18(2)(b)(v)