No. 41862 (Amendment): Rule R628-15. Certification as an Investment Adviser

(Amendment)

DAR File No.: 41862
Filed: 06/29/2017 11:16:12 AM

RULE ANALYSIS

Purpose of the rule or reason for the change:

This change is being made to address a statute amendment allowing certified investment advisers to use their list of approved broker dealers when trading for Utah public entities. Before this change, certified investment advisers were limited to dealing with only certified broker dealers for Utah public treasurer accounts, as approved by the Money Management Council. This change was made in Section 51-7-11.5 by H.B. 268 in the 2017 General Session.

Summary of the rule or change:

This change places a definition of approved brokers and dealers in the rule in Section R628-15-4. It adds a new Section R628-15-7 that provides a minimum criteria for brokers on the certified adviser's approved list of qualifying under SEC Rule 15C3-1 and renumbers the sections following. In Section R628-15-10, language is changed to allow certified advisers to use their approved list of dealers in the best interest of the public treasurer, and clarifies the use of soft dollar credits if applicable.

Statutory or constitutional authorization for this rule:

• Section 51-7-11.5

Anticipated cost or savings to:

the state budget:

This change does not affect any government entity, so no budget items are changed.

local governments:

This change does not affect local government entities, so there is no effect on the public treasurer.

small businesses:

The change allows certified investment advisers to use a potentially broader field of brokers, potentially making it easier for them to trade and receive better prices. Some of the Certified Advisers on the list employ fewer than 50 persons. In inquiring, these businesses have been unable to quantify for the Council any savings that may occur.

persons other than small businesses, businesses, or local governmental entities:

The change allows certified investment advisers to use a broader field of brokers, potentially making it easier for them to trade and receive better prices. Some of the Certified Advisers on the list employ more than 50 persons. In inquiring, these businesses have been unable to quantify for the Council any savings that may occur.

Compliance costs for affected persons:

The change allows certified investment advisers to use a broader field of brokers, potentially making it easier for them to trade and receive better prices. Some of the Certified Advisers on the list are larger than 50 persons. In inquiring, these businesses have been unable to quantify for the Council any savings that may occur.

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

After meeting with several certified investment advisers to receive their input on the change, it was determined by the Council that this proposed rule change will not have any fiscal impact on businesses. Providing investment advisers with a broader access to dealers/brokers might benefit local governments by creating a more competitive pricing, thus ensuring best execution.

Marina Scott, Chair

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

Money Management Council
Administration
Room 180 UTAH STATE CAPITOL COMPLEX
350 N STATE ST
SALT LAKE CITY, UT 84114

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]
• Marina Scott at the above address, by phone at 801-535-6565, by FAX at , 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:

08/14/2017

This rule may become effective on:

08/21/2017

Authorized by:

Marina Scott, 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), 51-7-18(2)(b)(vi) and (vii), and 51-7-11.5.

 

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.

 

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 of public funds by investment advisers would expose said 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";

5. "Investment adviser representative"; and

6. "Certified dealer".

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. "Realized rate of return" means yield calculated by combining interest earned, discounts accreted and premiums amortized, plus any gains or losses realized during the month, less all fees, divided by the average daily balance during the reporting period. The realized return should then be annualized.

3. "Soft dollar" means the value of research services and other benefits, whether tangible or intangible, provided to a certified investment adviser in exchange for the certified investment adviser's business.

4. "Approved list of brokers and dealers" means broker-dealers approved by a certified investment adviser to transact business on a public treasurer's account regardless of status as a certified dealer.

 

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 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.

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

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.

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).

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.

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.

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.

 

R628-15-7. Use of an Adviser's Approved List of Broker-Dealers.

If an investment adviser intends to use their own approved list of brokers-dealers, those broker-dealers on the adviser's approved list must qualify under SEC Rule 15C3-1 or other applicable regulatory requirements.

 

R628-15-[7]8. 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.

 

R628-15-[8]9. 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).

D. A Certified investment adviser whose certification has expired as of June 30 may not function as a Certified investment adviser until the investment adviser's certification is renewed.

 

R628-15-[9]10. 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).

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.

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.]Certified investment advisers shall use their approved list of broker-dealers or certified dealers in the best interest of the public treasurer's account for which they are transacting business when allocating transactions to broker-dealers.

I. Any value from transacting on a public treasurer's account accrued to the investment adviser, including soft dollar credits, for allocating transactions to broker-dealers must be paid back to the public treasurer's account. In addition, 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.

 

R628-15-[10]11. 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]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 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 material act in negligent or willful 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 an 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-[12]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 4, Title 63G ("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. After the close of the hearing, other members of the Council may make recommendations to the hearing officer.

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 suspension or termination, and the remedies required to cure the violation.

E. A Certified investment adviser and its Investment adviser representative who has received a Notice of Agency Action alleging violations of the Act or these rules, may continue, in the discretion of the public treasurer, to conduct investment transactions with the public treasurer until the violations asserted by the Money Management Council in the Notice of Agency Action becomes subject to a written order of the Council or Agency against the adviser or adviser representative, or until the Council enters an emergency order indicating that public funds will be jeopardized by continuing investment transactions with the adviser or adviser representative.

F. The Council may issue an emergency order to cease and desist operations or specified actions with respect to public treasurers or public funds. Further, the Council may issue an emergency suspension of certification if the Council determines that public funds will be jeopardized by continuing investment transactions or other specified actions with the adviser or adviser representative.

G. Within ten business days after the conclusion of a hearing on an emergency order, the Council shall lift this prohibition upon a finding that the Certified investment adviser and its investment adviser representative may maintain certification.

 

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

Date of Enactment or Last Substantive Amendment: [July 13, 2015]2017

Notice of Continuation: May 5, 2010

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)

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