Source: http://register.dls.virginia.gov/details.aspx?id=1897
Timestamp: 2018-07-18 03:05:47
Document Index: 40714008

Matched Legal Cases: ['§ 13', '§ 13', '§ 1841', '§ 203', '§ 80', '§ 13', '§ 80', '§ 77', '§ 78', '§ 15', 'art 1', '§ 15', '§ 78', '§ 1813', '§ 4', '§ 6', '§ 13', '§ 5', '§ 80', '§ 80']

Vol. 25 Iss. 22 (Final Regulation) 21VAC5-40, Exempt Securities July 06, 2009
Titles of Regulations: 21VAC5-10. General Administration - Securities Act (amending 21VAC5-10-40).
21VAC5-20. Broker-Dealers, Broker-Dealer Agents and Agents of the Issuer (amending 21VAC5-20-60, 21VAC5-20-70, 21VAC5-20-90, 21VAC5-20-130, 21VAC5-20-150, 21VAC5-20-160; adding 21VAC5-20-135).
21VAC5-40. Exempt Securities (amending 21VAC5-40-30).
21VAC5-80. Investment Advisors (amending 21VAC5-80-10, 21VAC5-80-70, 21VAC5-80-110, 21VAC5-80-130, 21VAC5-80-160; adding 21VAC5-80-145; repealing 21VAC5-80-140).
Agency Contact: Al Hughes, Registration Chief, State Corporation Commission, Securities Division, Tyler Building, 9th Floor, P.O. Box 1197, Richmond, VA 23218, telephone (804) 371-9415, FAX (804) 371-9912, or email al.hughes@scc.virginia.gov.
The amendments (i) adopt by reference recent changes to certain North American Securities Administrators Association, Inc. (NASAA) securities registration statements of policy; (ii) adopt by reference the NASAA Corporate Securities Definitions statement of policy; (iii) make changes to the notice filing requirements for offerings conducted pursuant to Rules 505 and 506 of Federal Regulation D; (iv) expand the definition of National Association of Securities Dealers, Inc. (NASD) to reflect its current name; (v) correct language for mergers and consolidations; (vi) eliminate the duplicative requirement to take the Series 7 exam and allow the Series 66 exam to qualify an individual as an agent; (vii) require individuals whose agent registration has lapsed for more than two years to requalify; (viii) provide relief for those individuals registered as agents or representatives with an entity that ceases to do business by allowing the individuals to make a termination request directly to the commission; (ix) allow retiring agents to continue to receive commissions without registration; (x) require additional documents be filed as part of the initial investment advisor application process, which will assist new investment advisors in setting up required records and increase protection for the investing public; (xi) require that all principals of investment advisors meet minimum qualification standards; (xii) clarify that all investment advisor representatives shall meet minimum standards; (xiii) adopt NASAA Custody rule; and (xiv) require investment advisors to develop a disaster recovery plan.
In accordance with public comments, amendments were made to the proposed regulation. The conditions of continuing commission by retiring agents in 21VAC5-20-135 are changed from a five-year requirement to a three-year requirement. The term "or legal beneficiary" is added to 21VAC5-80-145 to further clarify the term "beneficial owner." Language is added to 21VAC5-80-160 to further clarify fiduciary responsibilities.
AT RICHMOND, JUNE 15, 2009
CASE NO. SEC-2009-00022
By Order to Take Notice entered on April 7, 2009, all interested persons were ordered to take notice that the State Corporation Commission ("Commission") would consider the adoption of a revision to Chapters 10, 20, 30, 40, 45 and 80 of Title 21 of the Virginia Administrative Code ("Regulations") entitled "Rules and Forms Governing Virginia Securities Act." On April 20, 2009, the Division of Securities and Retail Franchising ("Division") mailed the Order to Take Notice of proposed amendments to the Regulations to all registrants and applicants as of April 9, 2009, and to all interested parties pursuant to the Virginia Securities Act, § 13.1-501 et seq. of the Code of Virginia. The Order to Take Notice described the proposed amendments and afforded interested parties an opportunity to file comments and request a hearing by May 15, 2009, with the Clerk of the Commission ("Clerk").1 The Commission also required the proposed amendments to be sent to the Registrar of Publications for publication in the Virginia Register of Regulations. In addition, the Order to Take Notice directed the Division to file a response to any comments by May 27, 2009, with the Clerk. Comments were filed with the Clerk by the Securities Industry and Financial Markets Association ("SIFMA") and Shawbrook. The Division filed its response to these comments on May 27, 2009. The Division's response was also posted on the Commission's website and the Division's website. No hearing was requested.
SIFMA commented that the proposed revisions to conditions numbered 1, 3 and 5 of proposed Rule 21 VAC 5-20-135 should be modified from a five-year requirement to a three-year requirement so as to conform to the U.S. Securities and Exchange Commission's ("SEC") position on the matter. Additionally, SIFMA commented that conditions numbered 6, 7 and 9 governing annual certification requirements of Rule 21 VAC 5-20-135 appeared duplicative and should be modified. As a result of the comment, the Division recommended the modification of the conditions numbered 1, 3 and 5 and the amendment of proposed Rule 21 VAC 5-20-135 from a five-year requirement to a three-year requirement. Additionally, the Division recommended the elimination of condition number 6 to Rule 21 VAC 5‑20-135. According to the Division, all other proposed revisions to Rule 21 VAC 5‑20-135 should remain unchanged.
Shawbrook requested modifications to Rule 21 VAC 5-80-145 and Rule 21 VAC 5‑80‑160. Specifically, Shawbrook commented that subsection C. 5. a. of Rule 21 VAC 5-80-145 did not provide an adequate definition of "beneficial owner." As a result of the comment, the Division proposed the following modification to subsection C. 5. a. of Rule 21 VAC 5-80-145:
The beneficial owner of the trust is a parent, a grandparent, a spouse, a sibling, a child, or a grandchild, or the legal beneficiary of the trustee. These relationships shall include "step" relationships.
According to the Division, all other modifications to the Rule suggested by Shawbrook were not necessary at this time, and the proposed revisions to Rule 21 VAC 5-80-145 should remain unchanged.
Additionally, Shawbrook commented on Rule 21 VAC 5-80-160 F. 1 and 3 regarding the continuing obligations of an investment advisor's backup disaster plan upon an investment advisor's death or from the incapacity of key advisory persons. As a result of the comment, the Division recommended additional language to further clarify fiduciary responsibilities under Rule 21 VAC 5‑80‑160 F. 1 and 3. According to the Division, all other modifications suggested by Shawbrook were not necessary at this time, and the other proposed revisions to Rule 21 VAC 5‑80-160 should remain unchanged.
The Commission, upon consideration of the proposed amendments to the Regulations, as modified in accordance with the recommendation of the Division, and the record in this case, finds that the proposed amendments to the Regulations, as modified, should be adopted.
(1) The proposed amended Regulations, as modified, are attached hereto, made a part hereof, and are hereby ADOPTED effective July 1, 2009. Rule 21 VAC 5‑80‑140 is hereby repealed.
AN ATTESTED COPY hereof shall be sent by the Clerk of the Commission to: Geoffrey F. Foise, Investments Manager, Shawbrook, 812 West Timber Branch Parkway, Alexandria, Virginia 22302-3620; Nancy Donohoe Lancia, Managing Director of State Government Affairs, SIFMA, 120 Broadway, 35th Floor, New York, New York 10271-0080; and the Commission's Office of General Counsel and the Division of Securities and Retail Franchising.
1 The Order to Take Notice mistakenly referenced a different case number (SEC-2008-00026) in Ordering Paragraph (2). By Order dated May 5, 2009, the Commission corrected Ordering Paragraph (2) of the Order to Take Notice to reference Case No. SEC-2009-00022. The Commission also directed the Clerk to file a copy of any correspondence referencing Case No. SEC-2008-00026, and filed subsequent to April 7, 2009, with papers in Case No. SEC-2009-00022.
21VAC5-10-40. Definitions.
As used in this chapter, the following regulations and forms pertaining to securities, instructions and orders of the commission, the following meanings shall apply:
"Act" means the Securities Act contained in Chapter 5 (§ 13.1-501 et seq.) of Title 13.1 of the Code of Virginia.
"Applicant" means a person on whose behalf an application for registration or a registration statement is filed.
"Application" means all information required by the forms prescribed by the commission as well as any additional information required by the commission and any required fees.
"Bank Holding Company Act of 1956" (12 USC § 1841 et seq.) means the federal statute of that name as now or hereafter amended.
"Boiler room tactics" mean operations or high pressure tactics utilized in connection with the promotion of speculative offerings by means of an intensive telephone campaign or unsolicited calls to persons not known by or having an account with the salesmen or broker-dealer represented by him, whereby the prospective purchaser is encouraged to make a hasty decision to invest, irrespective of his investment needs and objectives.
"Breakpoint" means the dollar level of investment necessary to qualify a purchaser for a discounted sales charge on a quantity purchase of open-end management company shares.
"Commission" means State Corporation Commission.
"Federal covered advisor" means any person who is registered or required to be registered under § 203 of the Investment Advisers Act of 1940 as an "investment adviser."
"Investment Advisers Act of 1940" (15 USC § 80b-1 et seq.) means the federal statute of that name as now or hereafter amended.
Notwithstanding the definition in § 13.1-501 of the Act, "investment advisor representative" as applied to a federal covered advisor only includes an individual who has a "place of business" (as that term is defined in rules or regulations promulgated by the SEC) in this Commonwealth and who either:
1. Is an "investment advisor representative" as that term is defined in rules or regulations promulgated by the SEC; or
2. a. Is not a "supervised person" as that term is defined in the Investment Advisers Act of 1940; and
b. Solicits, offers or negotiates for the sale of or sells investment advisory services on behalf of a federal covered advisor.
"Investment Company Act of 1940" (15 USC § 80a-1 et seq.) means the federal statute of that name as now or hereafter amended.
"NASAA" means the North American Securities Administrators Association, Inc.
"NASD" means the National Association of Securities Dealers, Inc., or its successor, the Financial Industry Regulatory Authority, Inc. (FINRA).
"Notice" or "notice filing" means, with respect to a federal covered advisor or federal covered security, all information required by the regulations and forms prescribed by the commission and any required fee.
"Registrant" means an applicant for whom a registration or registration statement has been granted or declared effective by the commission.
"Securities Act of 1933" (15 USC § 77a et seq.) means the federal statute of that name as now or hereafter amended.
"Securities Exchange Act of 1934" (15 USC § 78a et seq.) means the federal statute of that name as now or hereafter amended.
21VAC5-20-60. [ Broker-Dealer Broker-dealer ] merger or consolidation.
A. When there is a merger or consolidation of two or more registrants, or the reorganization of a registrant, the surviving or new corporation entity shall amend or file, as the case may be, Form BD (the filing of Form BD requires the payment of a $200 fee) and shall file a copy of the following with the commission at its Division of Securities and Retail Franchising upon its request:
1. The certificate of merger or consolidation.
2. The plan of merger or consolidation.
3. The amended or new charter and by-laws.
4. Any document of explanation.
5. The current financial statements of the surviving or new corporation entity and surety bond, if necessary.
B. Such amendment and/or filing shall be made immediately after the merger or consolidation becomes effective, except that the required financial statements shall be filed within 30 calendar days of the effective date of the merger or consolidation. The registration of the surviving or new corporation entity usually will be granted by the commission on the same date that the merger or consolidation becomes effective. Each agent of the nonsurviving or new corporation entity shall comply with 21VAC5-20-90 before registration as an agent with his new employer becomes effective. Every other agent of the defunct corporation shall comply with 21VAC5-20-90 or 21VAC5-20-130, whichever may be applicable.
1. All principals of an applicant for registration as a broker-dealer must provide the commission with evidence of passing: (i) the Uniform Securities Agent State Law Examination, Series 63; (ii) the Uniform Combined State Law Examination, Series 66, and the General Securities Representative Examination, Series 7; or (iii) a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates within the two-year period immediately preceding the date of the application.
2. In lieu of meeting the examination requirement described in subdivision 1 of this subsection [ A ], at least two principals of an applicant may provide evidence of having passed the General Securities Principal Qualification Exam (Series 24) or [ , ] in the case of a broker-dealer selling investment company securities only, at least two principals of an applicant may provide evidence of having passed the Investment Company and Variable Contracts Products Principal Exam (Series 26) or a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates Qualification Examination for Principals appropriate to the category of registration as specified by the type of business conducted by the broker-dealer within the two-year period immediately preceding the date of the applications.
For the purposes of this subsection [ A ], the term "principal" means any person associated with a broker-dealer who is engaged directly (i) in the management, direction or supervision on a regular or continuous basis on behalf of such broker-dealer of the following activities: sales, training, research, investment advice, underwriting, private placements, advertising, public relations, trading, maintenance of books or records, financial operations; or (ii) in the training of persons associated with such broker-dealer for the management, direction, or supervision on a regular or continuous basis of any such activities.
3. [ Subsection A of this section This subsection ] is applicable only to principals of broker-dealers that are, or intend to forthwith become, registered pursuant to § 15 of the federal Securities Exchange Act of 1934.
a. The Uniform Securities Agent State Law Examination, Series 63; the Uniform Combined State Law Examination, Series 66, and the General Securities Representative Examination, Series 7; or a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates within the two-year period immediately preceding the date of the application; and
b. Any additional securities-related examination that the commission deems appropriate in light of the business in which the applicant proposes to engage.; and
A. Application for registration as an agent of a NASD member shall be filed on and in compliance with all requirements of the NASAA/NASD Central Registration Depository system and in full compliance with the forms and regulations prescribed by the commission. The application shall include all information required by such forms.
An application shall be deemed incomplete for purposes of applying for registration as a broker-dealer agent unless the following executed forms, fee and information are submitted:
1. Form U-4.
2. The statutory fee in the amount of $30. The check must be made payable to the NASD.
3. Evidence in the form of a NASD exam report of passing within the two-year period immediately preceding the date of the application: (i) the Uniform Securities Agent State Law Examination, Series 63; (ii) the Uniform Combined State Law Examination, Series 66, and the General Securities Representative Examination, Series 7; or (iii) a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates.
B. Application for registration for all other broker-dealer agents shall be filed on and in compliance with all requirements and forms prescribed by the commission.
2. The statutory fee in the amount of $30. The check must be made payable to the Treasurer of Virginia.
21VAC5-20-130. Termination of registration.
A. When a broker-dealer agent terminates a connection with a broker-dealer, or a broker-dealer terminates connection with an agent, the broker-dealer shall file notice of such termination on Form U-5 within 30 calendar days of the date of termination. All filings shall be made with the NASAA/NASD Central Registration Depository system for agents of NASD member firms or with the commission for all other broker-dealer agents.
B. If an agent learns that the broker-dealer has not filed the notice, the agent may file notice with the commission at its Division of Securities and Retail Franchising. The commission may terminate the agent's registration if the commission determines that a broker-dealer (i) is no longer in existence, (ii) has ceased conducting securities business, or (iii) cannot reasonably be located.
21VAC5-20-135. Continuing commission by retiring agents.
The payment of compensation to a registered agent after he terminates his employment with a registered broker-dealer either by retirement, disability, death, or payment to his surviving spouse or other beneficiaries, will not be deemed to be a violation of commission regulations, provided the broker-dealer enters into a bona fide contract with either the retiring agent or the surviving spouse or beneficiaries, and the following conditions are met.
1. The retiring agent must have been continuously employed by or otherwise associated with the firm for a minimum of [ five three ] years, as of the date of his retirement.
2. The sharing of commissions will be limited to commissions derived from accounts held for continuing customers of the retiring agent regardless of whether customer funds or securities are added to the accounts during the period after retirement.
3. The retiring agent must have demonstrated that he conducted himself in a manner exhibiting appropriate professional conduct. At a minimum, retirees must have been subject to no more than a low incidence of investment-related customer complaints and arbitrations settled or decided for more than $25,000 in the [ five three ] years prior to the retirement date.
4. If the retiring agent has been subject to such complaints, the firm must have determined that the complaints did not require disciplinary action or heightened supervision, and that the retiree was not at fault for improper sales practices.
5. The retiring agent must not have been subject to a statutory disqualification during the [ five three ] years prior to retirement.
6. The retiring agent must comply, to the extent applicable, with federal and state securities statutes and regulations, all policies, procedures, and rules of relevant regulatory and self-regulatory bodies, and must certify compliance with the policy at least annually.
7. The broker-dealer must establish parameters for a reasonable time period, not to exceed five years, following retirement and a percentage scale (that is either fixed or decreases the percentage the retiring agent receives each year) regarding the sharing of commissions by the retiring agent and the receiving registered agent.
8. The retiring agent must certify at least annually to the broker-dealer that he has adhered to the requirements and conditions of the agreement.
9. The broker-dealer must contact a representative sample of the account holders including a significant set of high grossing customer accounts subject to the agreement at least annually to confirm that the retiring agent has not provided investment advice or solicited trades in securities in any way. For example, the broker-dealer may contact annually: (i) holders of the top 10 highest grossing client accounts for that year [ ; ] and (ii) holders of one-half of the next 25% highest grossing client accounts.
21VAC5-20-150. Examination/qualification.
A. An individual applying for registration as a broker-dealer agent shall be required to show evidence of passing within the two-year period immediately preceding the date of the application: (i) the Uniform Securities Agent State Law Examination, Series 63; (ii) the Uniform Combined State Law Examination, Series 66, and the General Securities Representative Examination, Series 7; or (iii) a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates.
B. Any individual who has met the qualifications set forth in subsection A of this section [ , ] and has been registered in any state jurisdiction requiring registration within the two-year period immediately preceding the date of the filing of an application shall not be required to comply with the examination requirement set forth in subsection A of this section, except that the commission may require additional examinations for any individual found to have violated any federal or state securities laws.
B. An application shall be deemed incomplete for purposes of applying for registration as an agent of the issuer unless the following executed forms, fee and information are submitted:
3. Completed Agreement for Inspection of Records Form.
4. 3. Evidence in the form of a NASD exam report of passing: (i) the Uniform Securities Agent State Law Examination, Series 63; (ii) the Uniform Combined State Law Examination, Series 66, and the General Securities Representative Examination, Series 7; or (iii) a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates.
4. All individuals listed on Part 1 of Form ADV in Schedule A as having supervisory or control of the investment advisor shall take and pass the examinations as required in subdivision [ B ] 3 of this [ section subsection ], and register as a representative of the investment advisor.
21VAC5-30-80. Adoption of NASAA statements of policy.
The commission adopts the following NASAA statements of policy that shall apply to the registration of securities in the Commonwealth. It will be considered a basis for denial of an application if an offering fails to comply with an applicable statement of policy. While applications not conforming to a statement of policy shall be looked upon with disfavor, where good cause is shown, certain provisions may be modified or waived by the commission.
1. Options and Warrants, as amended September 28, 1999 March 31, 2008.
2. Underwriting Expenses, Underwriter's Warrants, Selling Expenses and Selling Security Holders, as amended September 28, 1999 March 31, 2008.
3. Real Estate Programs, as amended September 29, 1993 May 7, 2007.
4. Oil and Gas Programs, as amended October 24, 1991 May 7, 2007.
6. Unsound Financial Condition, as amended September 28, 1999 March 31, 2008.
7. Real Estate Investment Trusts, as adopted September 29, 1993 amended May 7, 2007.
21VAC5-40-30. Uniform limited offering exemption.
Any securities offered or sold in compliance with the Securities Act of 1933, Regulation D (Reg. D), Rules 230.501-230.503 and 230.505 as made effective in Release No. 33-6389 (47 FR 11251), and as amended in Release Nos. 33-6437 (47 FR 54764), 33-6663 (51 FR 36385), 33-6758 (53 FR 7866) and 33-6825 (54 FR 11369) and which satisfy the following further conditions and limitations:
b. An undertaking by the issuer to promptly provide, upon written request, the information furnished by the issuer to offerees.
c. An executed consent to service of process (Form U2) appointing the Clerk of the commission as its agent for purpose of service of process, unless a currently effective consent to service of process is on file with the commission.
d. b. A filing fee of $250 payable to the Treasurer of Virginia.
[ FORMS (21VAC5-40)
Form D, Notice of Exempt Offering of Securities, U.S. Securities and Exchange Commission, SEC1972, (eff. 9/08). ]
21VAC5-45-20. Offerings conducted pursuant to Rule 506 of federal Regulation D (17 CFR [ § ] 230.506): Filing requirements and issuer-agent exemption.
2. An executed consent to service of process (Form U-2) appointing the Clerk of the commission as its agent for service of process.
3. 2. A filing fee of $250 payable to the Treasurer of Virginia.
C. For the purpose of this chapter, SEC "Form D" is the document, as adopted by the SEC and in effect on September 1, 1996 15, 2008, entitled "Form D; Notice of Sale of Securities pursuant to Regulation D, Section 4(6), and/or Uniform Limited Offering Exemption," including Part E and the Appendix. "Form D, Notice of Exempt Offering of Securities."
[ FORMS (21VAC5-45)
Investment Advisor Registration, Notice Filing for Federal Covered Advisors, Expiration, Renewal, Updates and Amendments, Terminations and Merger or Consolidation
21VAC5-80-10. Application for registration as an investment advisor and notice filing as a federal covered advisor.
A. Application for registration as an investment advisor shall be filed in compliance with all requirements of the Investment Advisor Registration Depository (IARD) system and in full compliance with forms and regulations prescribed by the commission and shall include all information required by such forms.
B. An application shall be deemed incomplete for purposes of applying for registration as an investment advisor unless the following executed forms, fee and information are submitted:
1. Form ADV Parts I and II submitted to the IARD system.
2. The statutory fee in the amount of $200 submitted to the IARD system.
3. A copy of the client agreement.
4. A copy of the firm's supervisory and procedures manual as required by 21VAC5-80-170.
5. Copies of all advertising materials.
6. Copies of all [ stationary stationery ] and business cards.
7. A signed affidavit stating that an investment advisor domiciled in Virginia has not conducted investment advisory business prior to registration, and for investment advisors domiciled outside of Virginia an affidavit stating that the advisor has fewer than six clients in any prior 12-month period.
8. The following financial statements:
a. A trial balance of all ledger account;
b. A statement of all client funds or securities that are not segregated;
c. A computation of the aggregate amount of client ledger debit balances;
d. A statement as to the number of client accounts;
e. Financial statements prepared in accordance with generally accepted accounting principles that shall include a balance sheet, income statement, and statement of cash flow.
9. A copy of the firm's disaster recovery plan as required by 21VAC5-80-160 F.
10. At least one qualified individual must have a registration pending on the IARD system on behalf of the investment advisor prior to the grant of registration.
3. 11. Any other information the commission may require.
For purposes of this section, the term "net worth" means an excess of assets over liabilities, as determined by generally accepted accounting principles, but shall not include as assets: prepaid expenses (except as to items properly classified as assets under generally accepted accounting principles), deferred charges such as deferred income tax charges, goodwill, franchise rights, organizational expenses, patents, copyrights, marketing rights, unamortized debt discount and expense, all other assets of intangible nature, home furnishings, automobiles, and any other personal items not readily marketable in the case of an individual; advances or loans to stockholders and officers in the case of a corporation; and advances or loans to partners in the case of a partnership.
D. Every person who transacts business in this Commonwealth as a federal covered advisor shall file a notice as prescribed in subsection E of this section in compliance with all requirements of the Investment Advisor Registration Depository (IARD) system.
E. A notice filing for a federal covered advisor shall be deemed incomplete unless the following executed forms, fee and information are submitted:
1. Form ADV.
A. Application for registration as an investment advisor representative shall be filed in compliance with all requirements of the NASAA/NASD Central Registration Depository system and in full compliance with forms and regulations prescribed by the commission. The application shall include all information required by such forms.
B. An application shall be deemed incomplete for purposes of applying for registration as an investment advisor representative unless the following executed forms, fee and information are submitted:
21VAC5-80-110. Termination of registration.
A. When an investment advisor representative terminates a connection with an investment advisor, or an investment advisor terminates connection with an investment advisor representative, the investment advisor shall file with the NASAA/NASD Central Registration Depository system notice of such termination on Form U-5 within 30 calendar days of the date of termination.
B. When an investment advisor representative terminates a connection with a federal covered advisor, the federal covered advisor shall file with the NASAA/NASD Central Registration Depository system notice of such termination on Form U-5 within 30 calendar days of the date of termination.
C. If a representative learns that the investment advisor has not filed the notice, the representative may file notice with the commission at its Division of Securities and Retail Franchising. The commission may terminate the representative's registration if the commission determines that an investment advisor (i) is no longer in existence, (ii) has ceased conducting securities business, or (iii) cannot reasonably be located.
B. Any individual who is currently has been registered as an investment advisor or investment advisor representative in any state jurisdiction requiring the registration and qualification of investment advisors or investment advisor representatives within the two-year period immediately preceding the date of the filing of an application shall not be required to satisfy the examination requirements for continued registration set forth in subsection A of this section, except that the commission may require additional examinations for any individual found to have violated any federal or state securities laws.
Any individual who has not been registered in any state jurisdiction for a period of two years shall be required to comply with the examination requirements of this section.
C. The examination requirements shall not apply to an individual who currently holds one of the following professional designations:
6. Such other professional designation, after reasonable notice and subject to review by the commission, as the Director of the Division of Securities and Retail Franchising designates.
D. In lieu of meeting the examination requirement described in subsection A of this section, an applicant who meets all the qualifications set forth below may file with the commission at its Division of Securities and Retail Franchising an executed Affidavit for Waiver of Examination (Form S.A.3).
6. The applicant verifies that none of the questions in Item 22 14 (disciplinary history) on his Form U-4 have been, or need be, answered in the affirmative.
[ Part III
Investment Advisor, Federal Covered Advisor and Investment Advisor Representative Regulations ]
21VAC5-80-140. Custody of client funds or securities by investment advisors. (Repealed.)
An investment advisor who takes or has custody of any securities or funds of any client must comply with the following; provided that an investment advisor having its principal place of business outside this Commonwealth and registered or licensed, and in compliance with the applicable books and records requirements, in the state where its principal place of business is located, shall only be required to make, keep current, maintain and preserve such of the following required books, ledgers and records as are not in addition to those required under the laws of the state in which it maintains its principal place of business:
1. An investment advisor with its principal place of business located in this Commonwealth shall notify the commission that it has or may have custody. Such notification may be given on Form ADV.
2. The securities of each client must be segregated, marked to identify the particular client having the beneficial interest therein and held in safekeeping in some place reasonably free from risk of destruction or other loss.
3. All client funds must be deposited in one or more bank accounts containing only clients' funds, such account or accounts must be maintained in the name of the investment advisor or agent or trustee for such clients, and the investment advisor must maintain a separate record for each such account showing the name and address of the bank where the account is maintained, the dates and amounts of deposits in and withdrawals from the account, and the exact amount of each client's beneficial interest in the account.
4. Immediately after accepting custody or possession of funds or securities from any client, the investment advisor must notify the client in writing of the place where and the manner in which the funds and securities will be maintained and subsequently, if and when there is a change in the place where or the manner in which the funds or securities are maintained, the investment advisor must give written notice thereof to the client.
5. At least once every three months, the investment advisor must send each client an itemized statement showing the funds and securities in the investment advisor's custody at the end of such period and all debits, credits and transactions in the client's account during such period.
6. At least once every calendar year, an independent public accountant must verify all client funds and securities by actual examination at a time chosen by the accountant without prior notice to the investment advisor. A certificate of such accountant stating that he or she has made an examination of such funds and securities, and describing the nature and extent of the examination, shall be filed with the commission promptly after each such examination.
7. This section shall not apply to an investment advisor also registered as a broker-dealer under § 15 of the Securities Exchange Act of 1934 (15 USC § 78o) if the broker-dealer is (i) subject to and in compliance with SEC Rule 15c3-1 (Net Capital Requirements for Brokers or Dealers) (17 CFR 240.15c3-1) under the Securities Exchange Act of 1934, or (ii) a member of an exchange whose members are exempt from SEC Rule 15c3-1, (17 CFR 240.15c3-1) under the provisions of paragraph (b)(2) thereof, and the broker-dealer is in compliance with all regulations and settled practices of the exchange imposing requirements with respect to financial responsibility and the segregation of funds or securities carried for the account of customers.
21VAC5-80-145. Custody requirements for investment advisors.
A. For purposes of this section, the following definitions shall apply:
1. "Custody" means holding directly or indirectly, client funds or securities, or having any authority to obtain possession of them.
a. Custody includes:
(1) Possession of client funds or securities unless received inadvertently and returned to the sender promptly, but in any case within three business days of receiving them;
(2) Any arrangement (including a general power of attorney) under which the investment advisor is permitted to withdraw client funds or securities maintained with a custodian upon the investment advisor's instruction to the custodian; and
(3) Any capacity (such as general partner of a limited partnership, managing member of a limited liability company, or a comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives the investment advisor or the investment advisor's supervised person legal ownership of or access to client funds or securities.
b. Receipt of client's securities or checks drawn by clients and made payable to unrelated third parties will not meet the definition of custody if forwarded to the third party within 24 hours of receipt and the advisor maintains the following records:
(1) A ledger or other listing of all securities or funds held or obtained, including the following information:
(a) Issuer;
(b) Type of security and series;
(d) For debt instruments, the denomination, interest rate and maturity date;
(e) Certificate number, including alphabetical prefix or suffix;
(f) Name in which registered;
(g) Date given to the advisor;
(h) Date sent to client or sender;
(i) Form of delivery to client or sender, or copy of the form of delivery to client or sender; and
(j) Mail confirmation number, if applicable, or confirmation by client or sender of the fund's or security's return.
2. "Independent representative" means a person who:
a. Acts as agent for an advisory client, including in the case of a pooled investment vehicle, for limited partners of a limited partnership, members of a limited liability company, or other beneficial owners of another type of pooled investment vehicle and by law or contract is obliged to act in the best interest of the advisory client or the limited partners, members, or other beneficial owners;
b. Does not control, is not controlled by, and is not under common control with the investment advisor; and
c. Does not have, and has not had within the past two years, a material business relationship with the investment advisor.
3. "Qualified custodian" means the following independent institutions or entities that are not affiliated with the advisor by any direct or indirect common control and have not had a material business relationship with the advisor in the previous two years:
a. A bank or savings association that has deposits insured by the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act, 12 USC § 1813;
b. A registered broker-dealer holding the client assets in customer accounts;
c. A registered futures commission merchant registered under § 4f(a) of the Commodity Exchange Act, 7 USC § 6f(a), holding the client assets in customer accounts, but only with respect to clients' funds and security futures, or other securities incidental to transactions in contracts for the purchase or sale of a commodity for future delivery and options thereon; and
d. A foreign financial institution that customarily holds financial assets for its customers, provided that the foreign financial institution keeps the advisory clients' assets in customer accounts segregated from its proprietary assets.
1. If the investment advisor is registered or required to be registered, it is unlawful and deemed to be a fraudulent, deceptive, or manipulative act, practice, or course of business under § 13.1-502 of the Virginia Securities Act for the investment advisor to have custody of client funds or securities unless:
a. The investment advisor notifies the commission in writing that the investment advisor has or may have custody. Such notification is required on Form ADV submitted to the IARD system;
b. A qualified custodian maintains those funds and securities in a separate account for each client under that client's name or in accounts that contain only investment advisor's clients' funds and securities, under the investment advisor's name as agent or trustee for the clients;
c. If the investment advisor opens an account with a qualified custodian on his client's behalf, either under the client's name or under the investment advisor's name as agent, the investment advisor must notify the client in writing of the qualified custodian's name, address, and the manner in which the funds or securities are maintained, promptly when the account is opened and following any changes to this information;
d. At least quarterly, the investment advisor sends an account statement to each client for whom the investment advisor has custody of funds or securities, identifying the amount of funds and of each security of which the investment advisor has custody at the end of the period and setting forth all transactions during that period; and
(1) An independent certified public accountant verifies all client funds and securities by actual examination at least once during each calendar year at a time chosen by the accountant without prior notice or announcement to the advisor and that is irregular from year to year, and files a copy of the auditor's report and financial statements with the commission within 30 days after the completion of the examination, along with a letter stating that it has examined the funds and securities and describing the nature and extent of the examination.
(2) The independent certified public accountant, upon finding any material discrepancies during the course of the examination, notifies the commission within one business day of the finding, by means of a facsimile transmission or electronic mail, followed by first class mail, directed to the attention of the Division of Securities and Retail Franchising.
(3) If the investment advisor is a general partner of a limited partnership (or managing member of a limited liability company, or holds a comparable position for another type of pooled investment vehicle), the account statements required under [ subdivisions c and subdivision 1 ] d of this [ subdivision subsection ] must be sent to each limited partner (or member or other beneficial owner or their independent representative).
(4) A client may designate an independent representative to receive, on his behalf, notices and account statements as required under subdivisions [ 3 and 4 1 c and d ] of this subsection.
2. An advisor who has custody as defined in subdivision A 1 a (2) of this section by having fees directly deducted from client accounts shall provide the following safeguards:
a. The investment advisor must have written authorization from the client to deduct advisory fees from the account held with the qualified custodian.
b. Each time a fee is directly deducted from a client account, the investment advisor must concurrently:
(1) Send the qualified custodian an invoice of the amount of the fee to be deducted from the client's account; and
(2) Send the client an invoice itemizing the fee. Itemization includes the formula used to calculate the fee, the amount of assets under management the fee is based on, and the time period covered by the fee.
c. The investment advisor notifies the commission in writing that the investment advisor intends to use the safeguards provided above. Such notification is required to be given on Form ADV.
d. An investment advisor having custody solely because it meets the definition of custody as defined in subdivision A 1 of this section and who complies with the safekeeping requirements in this subsection will not be required to meet the financial requirements for custodial advisors as set forth in 21VAC5-80-180 [ and subdivisions 1 d (1) and (2) of this subsection ].
3. An investment advisor who has custody as defined in subdivision A 1 of this section and who does not meet the exception provided [ under this subdivision in subdivision C ] 3 of this [ subsection section ] must, in addition to the safeguards set forth in [ subdivision A 4 subdivisions 1 a through d ] of this subsection, also comply with the following:
a. Hire an independent party to review all fees, expenses, and capital withdrawals from the pooled accounts.
b. Send all invoices or receipts to the independent party, detailing the amount of the fee, expenses, or capital withdrawal and the method of calculation such that the independent party can:
(1) Determine that the payment is in accordance with the pooled investment vehicle standards (generally the partnership agreement or membership agreement); and
(2) Forward, to the qualified custodian, approval for payment of the invoice with a copy to the investment advisor.
c. For purposes of this section, an independent party means a person who:
(1) Is engaged by an investment advisor to act as a gatekeeper for the payment of fees, expenses, and capital withdrawals from the pooled investment;
(2) Does not control and is not controlled by and is not under common control with the investment advisor, either directly or indirectly; and
(3) Does not have, and has not had within the past two years, a material business relationship with the investment advisor.
d. The investment advisor notifies the commission in writing that the investment advisor intends to use the safeguards provided above. Such notification is required to be given on Form ADV.
e. An investment advisor having custody solely because it meets the definition of custody as defined in subdivision A 1 of this section and who complies with the safekeeping requirements in this subsection will not be required to meet the financial requirements for custodial advisors as set forth in 21VAC5-80-180 [ and subdivisions 1 d (1) and (2) of this subsection ].
4. When a trust retains an investment advisor, investment advisor representative, or employee, director, or owner of an investment advisor as trustee, and the investment advisor acts as the investment advisor to that trust, the investment advisor shall:
a. Notify the commission in writing that the investment advisor intends to use the safeguards provided below. Such notification is required to be given on Form ADV submitted to the IARD system.
b. Send to the grantor of the trust, the attorney for the trust if it is a testamentary trust, the co-trustee (other than the investment advisor; investment advisor representative; or employee, director, or owner of the investment advisor); or a defined beneficiary of the trust, at the same time that it sends any invoice to the qualified custodian, an invoice showing the amount of the trustees' fee or investment management or advisory fee, the value of the assets on which the fees were based, and the specific manner in which the fees were calculated.
c. Enter into a written agreement with a qualified custodian that specifies the qualified custodian will not deliver trust securities to the investment advisor, any investment advisor representative or employee, director, or owner of the investment advisor, nor will transmit any funds to the investment advisor; any investment advisor representative or employee; director or owner of the investment advisor, except that the qualified custodian may pay trustees' fees to the trustee and investment management or advisory fees to investment advisor, provided that:
(1) The grantor of the trust or attorneys for the trust, if it is a testamentary trust, the co-trustee (other than the investment advisor; investment advisor representative; or employee, director, or owner of the investment advisor); or a defined beneficiary of the trust has authorized the qualified custodian in writing to pay those fees;
(2) The statements for those fees show the amount of the fees for the trustee and, in the case of statements for investment management or advisory fees, show the value of the trust assets on which the fee is based and the manner in which the fee was calculated; and
(3) The qualified custodian agrees to send to the grantor of the trust, the attorneys for a testamentary trust, the co-trustee (other than the investment advisor; investment advisor representative; or employee, director, or owner of the investment advisor); or a defined beneficiary of the trust, at least quarterly, a statement of all disbursements from the account of the trust, including the amount of investment management fees paid to the investment advisor and the amount of trustees' fees paid to the trustee.
d. Except as otherwise set forth in subdivision [ 3 4 ] d (1) of this subsection, the qualified custodian may transfer funds or securities, or both, of the trust only upon the direction of the trustee (who may be the investment advisor; investment advisor representative; or employee, director, or owner of the investment advisor), who the investment advisor has duly accepted as an authorized signatory. The grantor of the trust or attorneys for the trust, if it is a testamentary trust, the co-trustee (other than the investment advisor; investment advisor representative; or employee, director, or owner of the investment advisor); or a defined beneficiary of the trust, must designate the authorized signatory for management of the trust. The direction to transfer funds or securities, or both, can only be made to the following:
(1) To a trust company, bank trust department, or brokerage firm independent of the investment advisor for the account of the trust to which the assets relate;
(2) To the named grantors or to the named beneficiaries of the trust;
(3) To a third person independent of the investment advisor in payment of the fees or charges of the third person including, but not limited to:
(a) Attorney's, accountant's, or qualified custodian's fees for the trust; and
(b) Taxes, interest, maintenance, or other expenses, if there is property other than securities or cash owned by the trust;
[ (c) (4) ] To third persons independent of the investment advisor for any other purpose legitimately associated with the management of the trust; or
[ (d) (5) ] To a broker-dealer in the normal course of portfolio purchases and sales, provided that the transfer is made on payment against delivery basis or payment against trust receipt.
[ 5. e. ] An investment advisor having custody solely because it meets the definition of custody as defined in subdivision A 1 of this section and who complies with the safekeeping requirements in this subsection, will not be required to meet the financial requirements for custodial advisors as set forth in 21VAC5-80-180.
1. With respect to shares of an open-end company as defined in § 5(a)(1) of the Investment Company Act of 1940, 15 USC § 80a-5(a)(1) (mutual fund), the investment advisor may use the mutual fund's transfer agent in lieu of a qualified custodian for purposes of complying with subsection B of this section.
a. An investment advisor is not required to comply with subsection B of this section with respect to securities that are:
(1 ) Acquired from the issuer in a transaction or chain of transactions not involving any public offering;
(2) Uncertificated, and ownership thereof is recorded only on books of the issuer or its transfer agent in the name of the client; and
(3) Transferable only with prior consent of the issuer or holders of the outstanding securities of the issuer.
b. Notwithstanding subdivision [ B ] 2 a of this [ section subsection ], the provisions of subdivision [ B ] 2 of this [ section subsection ] are available with respect to securities held for the account of a limited partnership (or limited liability company, or other type of pooled investment vehicle) only if the limited partnership is audited, the audited financial statements are distributed, as described in subdivision [ B ] 3 of this [ section subsection ] and the investment advisor notifies the commission in writing that the investment advisor intends to provide audited financial statements, as described above. Such notification is required to be given on Form ADV.
3. The investment advisor is not required to comply with subdivision B 1 c of this section with respect to the account of a limited partnership (or limited liability company, or another type of pooled investment vehicle) that is subject to audit at least annually and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) within 120 days of the end of its fiscal year. The investment advisor shall also notify the commission in writing that the investment advisor intends to employ the use of the audit safeguards described above. Such notification is required to be given on Form ADV.
4. The investment advisor is not required to comply with this section with respect to the account of an investment company registered under the Investment Company Act of 1940, 15 USC §§ 80a-1 to 80a-64.
5. The investment advisor is not required to comply with safekeeping requirements of subsection B of this section or the net worth and bonding requirements of 21VAC5-80-180 if the investment advisor has custody solely because the investment advisor, investment advisor representative or employee, director, or owner of the investment advisor is a trustee for a beneficial trust, if all of the following conditions are met for each trust:
a. The beneficial owner of the trust is a parent, a grandparent, a spouse, a sibling, a child, or a grandchild [ , or the legal beneficiary ] of the trustee. These relationships shall include "step" relationships.
b. For each account under subdivision 5 a of this subsection the investment advisor complies with the following:
(1) Provide a written statement to each beneficial owner of the account setting forth a description of the requirements of subsection B of this section and the reasons why the investment advisor will not be complying with those requirements.
(2) Obtain from each beneficial owner a signed and dated statement acknowledging the receipt of the written statement required under subdivision 5 a [ (1) ] of this subsection.
(3) Maintain a copy of both documents described in subdivisions [ B 4 c and d 5 a (1) and (2) ] of this [ section subsection ] until the account is closed or the investment advisor is no longer trustee.
6. Any investment advisor who intends to have custody of client funds or securities but is not able to utilize a qualified custodian as defined in subdivision A 3 of this section shall first obtain approval from the commission and comply with all of the applicable safekeeping provisions under subsection B of this section including taking responsibility for those provisions that are designated to be performed by a qualified custodian.
21VAC5-80-160. Recordkeeping requirements for investment advisors.
A. Every investment advisor registered or required to be registered under the Act shall make and keep true, accurate and current the following books, ledgers and records, except an investment advisor having its principal place of business outside this Commonwealth and registered or licensed, and in compliance with the applicable books and records requirements, in the state where its principal place of business is located, shall only be required to make, keep current, maintain and preserve such of the following required books, ledgers and records as are not in addition to those required under the laws of the state in which it maintains its principal place of business:
1. A journal or journals, including cash receipts and disbursements records, and any other records of original entry forming the basis of entries in any ledger.
2. General and auxiliary ledgers (or other comparable records) reflecting asset, liability, reserve, capital, income and expense accounts.
3. A memorandum of each order given by the investment advisor for the purchase or sale of any security, of any instruction received by the investment advisor from the client concerning the purchase, sale, receipt or delivery of a particular security, and of any modification or cancellation of any such order or instruction. The memoranda shall show the terms and conditions of the order, instruction, modification or cancellation; shall identify the person connected with the investment advisor who recommended the transaction to the client and the person who placed the order; and shall show the account for which entered, the date of entry, and the bank, broker or dealer by or through whom executed where appropriate. Orders entered pursuant to the exercise of discretionary power shall be so designated.
4. All check books, bank statements, canceled checks and cash reconciliations of the investment advisor.
5. All bills or statements (or copies of), paid or unpaid, relating to the business as an investment advisor.
6. All trial balances, financial statements prepared in accordance with generally accepted accounting principles which shall include a balance sheet, income statement and such other statements as may be required pursuant to 21VAC5-80-180, and internal audit working papers relating to the investment advisor's business as an investment advisor.
7. Originals of all written communications received and copies of all written communications sent by the investment advisor relating to (i) any recommendation made or proposed to be made and any advice given or proposed to be given; (ii) any receipt, disbursement or delivery of funds or securities; and (iii) the placing or execution of any order to purchase or sell any security; however, (a) the investment advisor shall not be required to keep any unsolicited market letters and other similar communications of general public distribution not prepared by or for the investment advisor, and (b) if the investment advisor sends any notice, circular or other advertisement offering any report, analysis, publication or other investment advisory service to more than 10 persons, the investment advisor shall not be required to keep a record of the names and addresses of the persons to whom it was sent; except that if the notice, circular or advertisement is distributed to persons named on any list, the investment advisor shall retain with a copy of the notice, circular or advertisement a memorandum describing the list and the source thereof.
8. A list or other record of all accounts which list identifies the accounts in which the investment advisor is vested with any discretionary power with respect to the funds, securities or transactions of any client.
9. All powers of attorney and other evidences of the granting of any discretionary authority by any client to the investment advisor, or copies thereof.
10. All written agreements (or copies thereof) entered into by the investment advisor with any client, and all other written agreements otherwise related to the investment advisor's business as an investment advisor.
11. A file containing a copy of each notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication including by electronic media that the investment advisor circulates or distributes, directly or indirectly, to two or more persons (other than persons connected with the investment advisor), and if the notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication including by electronic media recommends the purchase or sale of a specific security and does not state the reasons for the recommendation, a memorandum of the investment adviser indicating the reasons for the recommendation.
12. a. A record of every transaction in a security in which the investment advisor or any investment advisory representative of the investment advisor has, or by reason of any transaction acquires, any direct or indirect beneficial ownership, except (i) transactions effected in any account over which neither the investment advisor nor any investment advisory representative of the investment advisor has any direct or indirect influence or control; and (ii) transactions in securities which are direct obligations of the United States. The record shall state the title and amount of the security involved; the date and nature of the transaction (i.e., purchase, sale or other acquisition or disposition); the price at which it was effected; and the name of the broker, dealer or bank with or through whom the transaction was effected. The record may also contain a statement declaring that the reporting or recording of any such transaction shall not be construed as an admission that the investment advisor or investment advisory representative has any direct or indirect beneficial ownership in the security. A transaction shall be recorded not later than 10 days after the end of the calendar quarter in which the transaction was effected.
b. For purposes of this subdivision 12, the following definitions will apply. The term "advisory representative" means any partner, officer or director of the investment advisor; any employee who participates in any way in the determination of which recommendations shall be made; any employee who, in connection with his duties, obtains any information concerning which securities are being recommended prior to the effective dissemination of the recommendations; and any of the following persons who obtain information concerning securities recommendations being made by the investment advisor prior to the effective dissemination of the recommendations:
(1) Any person in a control relationship to the investment adviser;
(2) Any affiliated person of a controlling person; and
(3) Any affiliated person of an affiliated person.
"Control" means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with the company. Any person who owns beneficially, either directly or through one or more controlled companies, more than 25% of the ownership interest of a company shall be presumed to control the company.
c. An investment advisor shall not be deemed to have violated the provisions of this subdivision 12 because of his failure to record securities transactions of any investment advisor representative if the investment advisor establishes that it instituted adequate procedures and used reasonable diligence to obtain promptly reports of all transactions required to be recorded.
13. a. Notwithstanding the provisions of subdivision 12 of this subsection, where the investment advisor is primarily engaged in a business or businesses other than advising investment advisory clients, a record must be maintained of every transaction in a security in which the investment advisor or any investment advisory representative of such investment advisor has, or by reason of such transaction acquires, any direct or indirect beneficial ownership, except (i) transactions effected in any account over which neither the investment advisor nor any investment advisory representative of the investment advisor has any direct or indirect influence or control; and (ii) transactions in securities which are direct obligations of the United States. The record shall state the title and amount of the security involved; the date and nature of the transaction (i.e., purchase, sale or other acquisition or disposition); the price at which it was effected; and the name of the broker, dealer or bank with or through whom the transaction was effected. The record may also contain a statement declaring that the reporting or recording of any such transaction shall not be construed as an admission that the investment advisor or investment advisory representative has any direct or indirect beneficial ownership in the security. A transaction shall be recorded not later than 10 days after the end of the calendar quarter in which the transaction was effected.
b. An investment advisor is "primarily engaged in a business or businesses other than advising investment advisory clients" when, for each of its most recent three fiscal years or for the period of time since organization, whichever is less, the investment advisor derived, on an unconsolidated basis, more than 50% of (i) its total sales and revenues, and (ii) its income (or loss) before income taxes and extraordinary items, from such other business or businesses.
c. For purposes of this subdivision 13, the following definitions will apply. The term "advisory representative," when used in connection with a company primarily engaged in a business or businesses other than advising investment advisory clients, means any partner, officer, director or employee of the investment advisor who participates in any way in the determination of which recommendation shall be made, or whose functions or duties relate to the determination of which securities are being recommended prior to the effective dissemination of the recommendations; and any of the following persons, who obtain information concerning securities recommendations being made by the investment advisor prior to the effective dissemination of the recommendations or of the information concerning the recommendations:
(1) Any person in a control relationship to the investment advisor;
d. An investment advisor shall not be deemed to have violated the provisions of this subdivision 13 because of his failure to record securities transactions of any investment advisor representative if he establishes that he instituted adequate procedures and used reasonable diligence to obtain promptly reports of all transactions required to be recorded.
14. A copy of each written statement and each amendment or revision, given or sent to any client or prospective client of such investment advisor in accordance with the provisions of 21VAC5-80-190 and a record of the dates that each written statement, and each amendment or revision, was given, or offered to be given, to any client or prospective client who subsequently becomes a client.
15. For each client that was obtained by the advisor by means of a solicitor to whom a cash fee was paid by the advisor, the following:
a. Evidence of a written agreement to which the advisor is a party related to the payment of such fee;
b. A signed and dated acknowledgement of receipt from the client evidencing the client's receipt of the investment advisor's disclosure statement and a written disclosure statement of the solicitor; and,
c. A copy of the solicitor's written disclosure statement. The written agreement, acknowledgement and solicitor disclosure statement will be considered to be in compliance if such documents are in compliance with Rule 275.206(4)-3 of the Investment Advisers Act of 1940.
For purposes of this regulation, the term "solicitor" means any person or entity who, for compensation, acts as an agent of an investment advisor in referring potential clients.
16. All accounts, books, internal working papers, and any other records or documents that are necessary to form the basis for or demonstrate the calculation of the performance or rate of return of all managed accounts or securities recommendations in any notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication including but not limited to electronic media that the investment advisor circulates or distributes directly or indirectly, to two or more persons (other than persons connected with the investment advisor); however, with respect to the performance of managed accounts, the retention of all account statements, if they reflect all debits, credits, and other transactions in a client's account for the period of the statement, and all worksheets necessary to demonstrate the calculation of the performance or rate of return of all managed accounts shall be deemed to satisfy the requirements of this subdivision.
17. A file containing a copy of all written communications received or sent regarding any litigation involving the investment advisor or any investment advisor representative or employee, and regarding any written customer or client complaint.
18. Written information about each investment advisory client that is the basis for making any recommendation or providing any investment advice to the client.
19. Written procedures to supervise the activities of employees and investment advisor representatives that are reasonably designed to achieve compliance with applicable securities laws and regulations.
20. A file containing a copy of each document (other than any notices of general dissemination) that was filed with or received from any state or federal agency or self regulatory organization and that pertains to the registrant or its investment advisor representatives, which file should contain, but is not limited to, all applications, amendments, renewal filings, and correspondence.
21. Any records documenting dates, locations and findings of the investment advisor's annual review of these policies and procedures conducted pursuant to subdivision E 2 of 21VAC5-80-170.
B. If an investment advisor subject to subsection A of this section has custody or possession of securities or funds of any client, the records required to be made and kept under subsection A of this section shall also include:
1. A journal or other record showing all purchases, sales, receipts and deliveries of securities (including certificate numbers) for such accounts and all other debits and credits to the accounts.
2. A separate ledger account for each client showing all purchases, sales, receipts and deliveries of securities, the date and price of each purchase and sale, and all debits and credits.
3. Copies of confirmations of all transactions effected by or for the account of any client.
4. A record for each security in which any client has a position, which record shall show the name of each client having any interest in each security, the amount or interest of each client, and the location of each security.
C. Every investment advisor subject to subsection A of this section who renders any investment advisory or management service to any client shall, with respect to the portfolio being supervised or managed and to the extent that the information is reasonably available to or obtainable by the investment advisor, make and keep true, accurate and current:
1. Records showing separately for each client the securities purchased and sold, and the date, amount and price of each purchase and sale.
2. For each security in which any client has a current position, information from which the investment advisor can promptly furnish the name of each client and the current amount or interest of the client.
D. Any books or records required by this section may be maintained by the investment advisor in such manner that the identity of any client to whom the investment advisor renders investment advisory services is indicated by numerical or alphabetical code or some similar designation.
E. Every investment advisor subject to subsection A of this section shall preserve the following records in the manner prescribed:
1. All books and records required to be made under the provisions of subsection A through subdivision C 1, inclusive, of this section, except for books and records required to be made under the provisions of subdivisions A 11 and A 16 of this section, shall be maintained in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the last entry was made on record, the first two years of which shall be maintained in the principal office of the investment advisor.
2. Partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment advisor and of any predecessor, shall be maintained in the principal office of the investment advisor and preserved until at least three years after termination of the enterprise.
3. Books and records required to be made under the provisions of subdivisions A 11 and A 16 of this section shall be maintained in an easily accessible place for a period of not less than five years, the first two years of which shall be maintained in the principal office of the investment advisor, from the end of the fiscal year during which the investment advisor last published or otherwise disseminated, directly or indirectly, the notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication including by electronic media.
4. Books and records required to be made under the provisions of subdivisions A 17 through A 20, inclusive, of this section shall be maintained and preserved in an easily accessible place for a period of not less than five years, from the end of the fiscal year during which the last entry was made on such record, the first two years in the principal office of the investment advisor, or for the time period during which the investment advisor was registered or required to be registered in the state, if less.
5. Notwithstanding other record preservation requirements of this subsection, the following records or copies shall be required to be maintained at the business location of the investment advisor from which the customer or client is being provided or has been provided with investment advisory services: (i) records required to be preserved under subdivisions A 3, A 7 through A 10, A 14 and A 15, A 17 through A 19, subsections B and C, and (ii) the records or copies required under the provision of subdivisions A 11 and A 16 of this section which records or related records identify the name of the investment advisor representative providing investment advice from that business location, or which identify the business locations' physical address, mailing address, electronic mailing address, or telephone number. The records will be maintained for the period described in this subsection.
F. Every investment advisor shall establish and maintain a written disaster recovery plan that shall address at a minimum:
1. The identity of individuals that will conduct [ or wind down ] business on behalf of the investment advisor in the event of death or incapacity of key persons;
2. Means to provide notification to clients of the investment advisor and to those states in which the advisor is registered of the death or incapacity of key persons;
a. Notification shall be provided to the Division of Securities and Retail Franchising via the IARD/CRD system within 24 hours of the death or incapacity of key persons.
b. Notification shall be given to clients within five business days from the death or incapacity of key persons.
3. Means for clients' accounts to continue to be monitored until an orderly liquidation, distribution or transfer of the clients' portfolio to another advisor can be achieved [ or until an actual notice to the client of investment advisor death or incapacity and client control of their assets occurs ];
4. Means for the credit demands of the investment advisor to be met; and
5. Data backups sufficient to allow rapid resumption of the investment advisor's activities.
F. G. An investment advisor subject to subsection A of this section, before ceasing to conduct or discontinuing business as an investment advisor, shall arrange for and be responsible for the preservation of the books and records required to be maintained and preserved under this section for the remainder of the period specified in this section, and shall notify the commission in writing of the exact address where the books and records will be maintained during such period.
G. H. 1. The records required to be maintained pursuant to this section may be immediately produced or reproduced by photograph on film or, as provided in subdivision 2 of this subsection, on magnetic disk, tape or other computer storage medium, and be maintained for the required time in that form. If records are preserved or reproduced by photographic film or computer storage medium, the investment advisor shall:
a. Arrange the records and index the films or computer storage medium so as to permit the immediate location of any particular record;
b. Be ready at all times to promptly provide any facsimile enlargement of film or computer printout or copy of the computer storage medium which the commission by its examiners or other representatives may request;
c. Store separately from the original one other copy of the film or computer storage medium for the time required;
d. With respect to records stored on computer storage medium, maintain procedures for maintenance of, and access to, records so as to reasonably safeguard records from loss, alteration, or destruction; and
e. With respect to records stored on photographic film, at all times have available, for the commission's examination of its records, facilities for immediate, easily readable projection of the film and for producing easily readable facsimile enlargements.
2. Pursuant to subdivision 1 of this subsection, an advisor may maintain and preserve on computer tape or disk or other computer storage medium records which, in the ordinary course of the advisor's business, are created by the advisor on electronic media or are received by the advisor solely on electronic media or by electronic transmission.
H. I. Any book or record made, kept, maintained, and preserved in compliance with SEC Rules 17a-3 (17 CFR 240.17a-3) and 17a-4 (17 CFR 240.17a-4) under the Securities Exchange Act of 1934, which is substantially the same as the book, or other record required to be made, kept, maintained, and preserved under this section shall be deemed to be made, kept, maintained, and preserved in compliance with this section.
I. J. For purposes of this section, "investment supervisory services" means the giving of continuous advice as to the investment of funds on the basis of the individual needs of each client; and "discretionary power" shall not include discretion as to the price at which or the time when a transaction is or is to be effected if, before the order is given by the investment advisor, the client has directed or approved the purchase or sale of a definite amount of the particular security.
K. For purposes of this section, "principal place of business" and [ "principle "principal ] office" mean the executive office of the investment advisor from which the officers, partners, or managers of the investment advisor direct, control, and coordinate the activities of the investment advisor.
J. L. Every investment advisor registered or required to be registered in this Commonwealth and has its principal place of business in a state other than the Commonwealth shall be exempt from the requirements of this section to the extent provided by the National Securities Markets Improvement Act of 1996 (Pub.L. No. 104-290), provided the investment advisor is licensed in such state and is in compliance with such state's recordkeeping requirements.
VA.R. Doc. No. R09-1797; Filed June 18, 2009, 9:46 a.m.