Section 21 030 002 - REGULATION S-95-1 - INVESTMENT ADVISERS [AND INVESTMENT ADVISER REPRESENTATIVES]Section 1 AUTHORITY, SCOPE AND PURPOSE 1.01 This regulation is issued by the Department of Banking, Insurance and Securities pursuant to the authority vested in the Commissioner of Banking, Insurance and Securities ("Commissioner") by Title 9 V.S.A., sections 4237, 4217(c), 4224a(e)(5), 4224a(1) and 4224a(j).1.02 This regulation applies to any person that transacts business in the state of Vermont as an investment adviser or investment adviser representative.1.03 The purpose of this regulation is to establish rules which govern the registration and the regulated activities of investment advisers and investment adviser representatives in the state of Vermont.Section 2 DEFINITIONS 2.01 All citations to the "Act" or certain sections thereof refer to the Vermont Securities Act, Title 9 V.S.A. Chapter 131, sections 4201 et. seq. The definitions set forth in section 4202a of the Act apply to this regulation.2.02 Notwithstanding section 4202a(8) of the Act, the term "investment adviser representative" who is employed by or associated with a federal covered adviser only includes an individual who either: a. is an "investment adviser representative" who has a "place of business" as those terms are defined in rules or regulations promulgated under Section 203A of the Investment Advisers Act of 1940 by the U.S. Securities and Exchange Commission; orb.(1) is not a "supervised person" as that term is defined in rules or regulations promulgated under the Investment Advisers Act of 1940 by the U.S. Securities and Exchange Commission, and(2) solicits, offers or negotiates for the sale of or sells investment advisory services on behalf of a federal covered adviser.3.01 INITIAL AND RENEWAL REGISTRATION AS AN INVESTMENT ADVISER a. An application for initial registration as an investment adviser in the state of Vermont shall be filed with the Commissioner of Banking, Insurance and Securities ("Commissioner") upon Form ADV (Uniform Application for Investment Adviser Registration under the Investment Advisers Act of 1940). The Form ADV shall contain a manually signed and notarized execution page.b. The application shall also contain the following: (1) The Vermont Investment Adviser Certification Form which requires the following: (A) From those applicants who have custody of client funds, assets or securities or require payment of fees 6 or more months in advance and in excess of $ 500 per client, an audited balance sheet prepared in accordance with generally accepted accounting principles, and, if applicable, a surety bond, in the form prescribed by and available from the Commissioner; or(B) From those applicants who have discretionary authority over but not custody of client funds, assets or securities, a balance sheet prepared in accordance with generally accepted accounting principles, and, if applicable, a surety bond, in the form prescribed by and available from the Commissioner; and(C) A Certification that names the designated supervisor and certifies that the applicant has established and shall maintain and enforce written supervisory policies and procedures pursuant to Rule 3.04 of this regulation.(2) The fee required by section 4214(a) of the Act.(3) A copy of each document used to comply with Rule 3.12 of this regulation (the "brochure rule").(4) A sample copy of the investment advisory contract utilized by the investment adviser applicant that complies with Rule 3.10 of this regulation.(5) An irrevocable consent to service of process (Form U-2) appointing the Commissioner of Banking, Insurance, Securities and Health Care Administration as the applicant's attorney for service of process, and, if necessary, a corporate resolution (Form U-2A).(6) Any other information the Commissioner may require.c. An application for renewal registration as an investment adviser in the state of Vermont shall be filed annually with the Commissioner upon the Vermont Investment Adviser Certification Form. A renewal application will be considered timely if filed between October 1st and December 1st and shall contain: (1)(A) A manually signed statement by a person authorized by the applicant to file Form ADV that all required amendments to Form ADV have been filed with the Commissioner; and(B) Amendments to the documents previously filed with the Commissioner that were not amended as required by Rule 3.17 of this regulation.(2) The fee required by section 4218 of the Act.d. Each investment adviser registered in the state of Vermont shall register with the Commissioner at least one investment adviser representative.e. Applications for initial and renewal registration as an investment adviser in the state of Vermont will not be considered "filed" until the required fee and all required submissions have been received by the Commissioner.3.02 INITIAL AND RENEWAL REGISTRATION AS AN INVESTMENT ADVISER REPRESENTATIVE a. An application for initial registration as an investment adviser representative in the state of Vermont shall be filed with the Commissioner upon Form U-4 (Uniform Application for Securities Industry Registration or Transfer). The Form U-4 shall be manually executed by both the applicant and the investment adviser.b. The application shall also contain the following: (1) The Vermont Investment Adviser Certification Form which requires evidence of compliance by the applicant with the examination requirements of Rule 3.03 of this regulation.(2) The fee required by section 4217(b) of the Act.c. An application for renewal registration as an investment adviser representative in the state of Vermont shall be filed annually by the investment adviser with the Commissioner upon the Vermont Investment Adviser Certification Form. A renewal application will be considered timely if filed between October 1st and December 1st and shall contain: (1) A roster of all investment adviser representatives applying for renewal registration in the state of Vermont listing their names, Vermont investment adviser representative numbers, social security numbers and, when applicable, CRD numbers.(2)(A) A certification by the investment adviser that each such representative has a current Form U-4 on file with the Commissioner and that all required amendments to the Form U-4 have been filed with the Commissioner; and(B) Amendments to the documents previously filed with the Commissioner that were not amended as required by Rule 3.17 of this regulation;(3) The fee required by section 4218 of the Act.d. Applications for initial or renewal registration as an investment adviser representative in the state of Vermont will not be considered "filed" until the required fee and all required submissions have been received by the Commissioner.3.03 EXAMINATION REQUIREMENTS FOR INVESTMENT ADVISER REPRESENTATIVES a. Effective January 1, 2000, an individual applying to be registered as an investment adviser representative shall provide the Commissioner with proof of obtaining a passing score on one of the following examinations: 1. The Uniform Investment Adviser Law Examination (Series 65 examination); or2. The General Securities Representative Examination (Series 7 examination) and the Uniform Combined State Law Examination (Series 66 examination).b. Grandfathering 1. Any individual who is registered as an investment adviser or investment adviser representative in any jurisdiction in the United States on January 1, 2000 shall not be required to satisfy the examination requirements for continued registration, except that the Commissioner may require additional examinations for any individual found to have violated any state or federal securities law.2. An individual who has not been registered in any jurisdiction for a period of two (2) years shall be required to comply with the examinations requirements of this Regulation.c. Waivers. The examination requirements shall not apply to an applicant who currently holds one of the following professional designations: 1. Certified Financial Planner (CFP) awarded by the Certified Financial Planner Board of Standards, Inc.;2. Chartered Financial Consultant (ChFC) awarded by the American College, Bryn Mawr, Pennsylvania:3. Personal Financial Specialist (PFS) awarded by the American Institute of Certified Public Accountants;4. Chartered Financial Analyst (CFA) awarded by the Institute of Chartered Financial Analysts;5. Chartered Investment Counselor (CIC) awarded by the Investment Counsel Association of America, Inc.; or6. Such other professional designation as the Commissioner may by rule or order recognize.d. Based on demonstration by an individual of relevant factors including, but not limited to, education and experience, the Commissioner shall consider an individual's request for a waiver of the examination requirements in accordance with section 4217(c) of the Act.3.04 INVESTMENT ADVISER SUPERVISION a. An investment adviser registered or required to be registered in the state of Vermont shall establish, maintain and enforce written supervisory policies and procedures that are reasonably designed to achieve compliance with the Act, these rules, and applicable federal securities laws and regulations. Final responsibility for proper supervision shall rest with the investment adviser. This supervisory system shall, at minimum, provide: (1) The designation of an appropriately registered investment adviser representative with the authority to oversee the supervisory responsibilities of the investment adviser.(2) The assignment of each registered investment adviser representative to an appropriately registered investment adviser representative who shall be responsible for supervising that person's activities.(3) Reasonable efforts to determine that all supervisory personnel are qualified by virtue of experience or training to carry out their assigned responsibilities.(4) The establishment and maintenance of written supervisory policies and procedures required below. (A) Each investment adviser shall establish, maintain and enforce written policies and procedures to supervise the types of business in which it engages and to supervise the activities of its investment adviser representatives and other employees that are reasonably designed to achieve compliance with applicable state or federal securities laws and regulations.(B) A copy of the investment adviser's written supervisory policies and procedures, or the relevant portions thereof, shall be kept at each location where activities are conducted on behalf of the investment adviser in the state of Vermont. The written supervisory policies and procedures shall be amended as necessary to reflect any change in state or federal securities laws and regulations.(5) Each investment adviser shall conduct a review, at least annually or more often if circumstances warrant, to ensure compliance with the written supervisory policies and procedures.(6) Each investment adviser shall establish procedures for internal review and endorsement by supervisory personnel in writing of all transactions and all correspondence of its investment adviser representatives pertaining to the rendering of investment advice to individual clients.(7) Each investment adviser shall have the responsibility and duty to reasonably ascertain by investigation the good character, business repute, qualifications, and experience of any person prior to making a certification in the application of such person for registration.3.05 FINANCIAL REQUIREMENTS FOR CERTAIN INVESTMENT ADVISERS. a. An investment adviser registered or required to be registered in the state of Vermont who has custody of client funds or securities shall maintain at all times a minimum net worth of $ 35,000, and every investment adviser registered or required to be registered under the Act who has discretionary authority over but not custody of client funds or securities shall maintain at all times a minimum net worth of $ 10,000.b. An investment adviser registered or required to be registered under the Act who accepts prepayment of more than $ 500 per client and six or more months in advance shall maintain at all times a positive net worth.c. Unless otherwise exempted, as a condition of the right to continue to transact business in this state, every investment adviser registered or required to be registered in the state of Vermont shall by the close of business on the next business day notify the Commissioner if such investment adviser's total net worth is less than the minimum required. After transmitting such notice, each investment adviser shall file by the close of business on the next business day a report with the Commissioner of its financial condition, including the following: (1) A trial balance of all ledger accounts;(2) A statement of all client funds or securities which are not segregated;(3) A computation of the aggregate amount of client ledger debit balances; and(4) A statement as to the number of client accounts.d. For purposes of this Rule, the term "net worth," shall mean 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 current assets under generally accepted accounting principles), deferred charges, goodwill, franchise rights, organizational expenses, patents, copyrights, marketing rights, unamortized debt discount and expense, all other assets of intangible nature; home, home furnishings, automobile(s), or 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.e. For purposes of this Rule, a person will be deemed to have custody if said person directly or indirectly holds client funds or securities, has any authority to obtain possession of them or has the ability to appropriate them.f. The Commissioner may require that a current appraisal be submitted in order to establish the worth of any asset.g. Every investment adviser that has its principal place of business in a state other than this state shall maintain only such minimum capital as required by the state in which the investment adviser maintains its principal place of business, provided the investment adviser is licensed in such state and is in compliance with such state's minimum capital requirements.h. Every investment adviser registered or required to be registered under the Act who has custody or discretion of client funds or securities who does not meet the minimum net worth standards in subsection (a) shall be bonded in the amount of the net worth deficiency rounded up to the nearest $ 5,000. Any bond required by this rule shall be issued by a company qualified to do business in this state in the form determined by the Commissioner and shall be subject to the claims of all clients of such investment adviser regardless of the client's state of residence.i. An investment adviser that has its principal place of business in a state other than this state shall be exempt from the requirements of subsection (h), provided that the investment adviser is registered as an investment adviser in the state where it has its principal place of business and is in compliance with such state's requirements relating to bonding.3.06 CUSTODY OF CLIENT FUNDS OR SECURITIES BY INVESTMENT ADVISERS. a. It shall be unlawful for any investment adviser to take or have custody of any securities or funds of any client unless: (1) The investment adviser notifies the Commissioner in writing that the investment adviser has or may have custody. Such notification may be given on Form ADV;(2) The securities of each client are 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)(A) All client funds are deposited in one or more bank accounts containing only clients' funds,(B) such account or accounts are maintained in the name of the investment adviser as agent or trustee for such clients, and(C) the investment adviser maintains 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 adviser notifies 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 adviser gives written notice thereof to the client;(5) At least once every three months, the investment adviser sends each client an itemized statement showing the funds and securities in the investment adviser's custody at the end of such period and all debits, credits and transactions in the client's account during such period; and(6) At least once every calendar year, an independent certified public accountant or independent public accountant verifies all client funds and securities by actual examination at a time chosen by the accountant without prior notice to the investment adviser. A report stating that such accountant has made an examination of such funds and securities, and describing the nature and extent of the examination, shall be filed with the Commissioner promptly after each such examination.(7) For the purposes of this Rule, a person will be deemed to have custody if said person directly or indirectly holds client funds or securities, has any authority to obtain possession of them or has the ability to appropriate them.b. This Rule shall not apply to an investment adviser also registered as a broker-dealer under Section 15 of the Securities Exchange Act of 1934 if the broker-dealer is: (1) subject to and in compliance with SEC Rule 15c3-1 (Net Capital Requirements for Brokers or Dealers), 17 C.F.R. 240.15c3 - 1 under the Securities Exchange Act of 1934, or(2) a member of an exchange whose members are exempt from SEC Rule 15c3-1, 17 C.F.R. 240.15c3 - 1 under the provisions of paragraph (b)(2) thereof, and the broker-dealer is in compliance with all rules 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.3.07 DISHONEST OR UNETHICAL PRACTICES. As used in section 4224a(e)(5) of the Act dishonest or unethical practices shall include, but not be limited to the following:
a. Recommending to a client to whom investment supervisor, management or consulting services are provided the purchase, sale or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the client on the basis of information furnished by the client after reasonable inquiry concerning the client's investment objectives, financial situation and needs, and any other information known or acquired by the investment adviser after reasonable examination of the client's records as may be provided to the investment adviser.b. Placing an order to purchase or sell a security for the account of a client without written authority to do so.c. Placing an order to purchase or sell a security for the account of a client upon instruction of a third party without first having obtained a written third-party trading authorization from the client.d. Exercising any discretionary power in placing an order for the purchase or sale of securities without first obtaining written discretionary authority, unless the discretionary power relates solely to the piece at which, or the time when, an order involving a definite amount of specified securities shall be executed, or both.e. Inducing trading in a client's account that is excessive in size or frequency in view of the financial resources, investment objectives and character of the account.f. Borrowing money or securities from a client unless the client is a broker-dealer, an affiliate, of the investment adviser, or a member of the immediate family of the investment adviser or investment adviser representative, or a financial institution engaged in the business of loaning funds or securities.g. Loaning money to a client unless the investment adviser is a financial institution engaged in the business of loaning funds or the client is an affiliate of the investment adviser or a member of the immediate family of the investment adviser or investment adviser representative.h. Misrepresenting to any advisory client, or prospective advisory client, the qualifications of the adviser, its representatives or any employees or misrepresenting the nature of the advisory services being offered or fees to be charged for such service, or omitting to state a material fact necessary to make the statements made regarding qualifications, services or fees, in light of the circumstances under which they are made, not misleading.i. Providing a report or recommendation to any advisory client prepared by someone other than the investment adviser without disclosing that fact. (This prohibition does not apply to a situation where the investment adviser uses published research reports or statistical analyses to render advice or where an investment adviser orders such a report in the normal course of providing service.)j. Charging a client an advisory fee that is unreasonable.k. Failing to disclose to a client in writing before entering into or renewing an advisory agreement with that client any material conflict of interest relating to the investment adviser, its representatives or any of its employees, which could reasonably be expected to impair the rendering of unbiased and objective advice including: (1) Compensation arrangements connected with advisory services to clients which are in addition to compensation from such clients for such services; and(2) Charging a client an advisory fee for rendering advice without disclosing that a commission for executing securities transactions pursuant to such advice will be received by the investment adviser, its representatives or its employees or that such advisory fee is being reduced by the amount of the commission earned by the investment adviser, its representatives or employees for the sale of securities to the client.l. Guaranteeing a client that a specific result will be achieved (gain or loss) as a result of the advice which will be rendered.m. Publishing, circulating or distributing any advertisement which does not comply with Rule 3.18 of this regulation.n. Disclosing the identity, affairs, or investments of any client to any third party unless required by law to do so, or unless consented to by the client.o. Taking any action, directly or indirectly, with respect to those securities or funds in which any client has any beneficial interest, where the investment adviser has custody or possession of such securities or funds when the investment adviser's action is subject to and does not comply with the safekeeping requirements of Rule 206(4)-2 under the Investment Advisers Act of 1940 or the adviser is exempt from these requirements by virtue of Rule 3.06(b) of this regulation.p. Entering into, extending or renewing any investment advisory contract, other than a contract for impersonal advisory services, unless such contract is in writing and discloses, in substance, the services to be provided, the term of the contract, the advisory fee or the formula for computing the fee, the amount or the manner of calculation of the amount of the prepaid fee to be returned in the event of contract termination or non-performance, whether the contract grants discretionary power to the investment adviser or its representatives and that no assignment of such contract shall be made by the investment adviser without the consent of the other party to the contract.q. Employing any device, scheme, or artifice to defraud or engaging in any act, practice or course of business which operates or would operate as a fraud or deceit.r. It shall constitute a dishonest and unethical business practice within the meaning of section 4224a(e)(5) of the Act for any investment adviser to fail to disclose to any client or prospective client all material facts with respect to: (1) A financial condition of the adviser that is reasonably likely to impair the ability of the investment adviser to meet contractual commitments to clients, if the investment adviser has discretionary authority (express or implied) or custody over such client's funds, assets or securities, or requires payment of advisory fees 6 or more months in advance and in excess of $ 500 per client; or(2) A legal or disciplinary event that is material to an evaluation of the investment adviser's integrity or ability to meet contractual commitments to clients.s. There shall be a rebuttable presumption that the following legal or disciplinary events involving the investment adviser or a management person of the adviser (any of the foregoing being referred to hereafter as "person") that were not resolved in the person's favor or subsequently reversed, suspended, or vacated are material within the meaning of paragraph (r)(2) of this Rule for a period of 10 years from the time of the event: (1) A criminal or civil action in a court of competent jurisdiction in which the person: (A) Was convicted, pleaded guilty or nolo contendere ("no contest") to a felony or misdemeanor, or is the named subject of a pending criminal proceeding (any of the foregoing referred to hereafter as "action"), and such action involved: an investment-related business, fraud, false statements, or omissions; wrongful taking of property; or bribery, forgery, counterfeiting, or extortion;(B) Was found to have been involved in a violation of an investment-related statute or regulation; or(C) Was the subject of any order, judgment, or decree permanently or temporarily enjoining the person from, or otherwise limiting the person from, engaging in any investment-related activity.(2) Administrative proceedings before the Commissioner, Securities and Exchange Commission, any other federal regulatory agency or any other state agency (any of the foregoing being referred to hereafter as agency") in which the person: (A) Was found to have caused an investment-related business to lose its authorization to do business; or(B) Was found to have been involved in a violation of an investment-related statute or regulation and was the subject of an order by the agency denying, suspending, or revoking the authorization of the person to act in, or barring or suspending the person's association with, an investment-related business; or otherwise significantly limiting the person's investment-related activities.(3) Self-Regulatory Organization (SRO) proceedings in which the person; (A) Was found to have caused an investment-related business to lose its authorization to do business; or(B) Was found to have been involved in a violation of the SRO's rules and was the subject of an order by the SRO barring or suspending the person from membership or from association with other members, or expelling the person from membership; fining the person more than $ 2,500; or otherwise significantly limiting the person's investment-related activities.t. The information required to be disclosed by paragraph (r) shall be disclosed to clients promptly, and to prospective clients not less than 48 hours prior to entering into any written or oral investment advisory contract, or no later than the time of entering into such contract if the client has the right to terminate the contract without penalty within five business days after entering into the contract.u. For purposes of this Rule: (1) "Management person" means a person with power to exercise, directly or indirectly, a controlling influence over the management or policies of an adviser which is a company or to determine the general investment advice given to clients.(2) "Found" means determined or ascertained by adjudication or consent in a final SRO proceeding, administrative proceeding, or court action.(3) "Investment-related" means pertaining to securities, commodities, banking, insurance, or real estate (including, but not limited to, acting as or being associated with a brokerdealer, investment company, investment adviser, government securities broker or dealer, municipal securities dealer, bank, savings and loan association, entity or person required to be registered under the Commodity Exchange Act [ 7 U.S.C. 1 et seq.] or fiduciary).(4) "Involved" means acting or aiding, abetting, causing, counseling, commanding, inducing, conspiring with or failing reasonably to supervise another in doing an act.(5) "Self-Regulatory Organization" or "SRO" means any national securities or commodities exchange, registered association, or registered clearing agency.v. For purposes of calculating the 10-year period during which events are presumed to be material under paragraph (s), the date of a reportable event shall be the date on which the final order, judgment, or decree was entered, or the date on which any rights of appeal from preliminary orders, judgments, or decrees lapsed.w. Compliance with this Rule shall not relieve any investment adviser from the obligations of any other disclosure requirement under the Act, the rules and regulations thereunder, or under any other federal or state law.3.08 AGENCY CROSS TRANSACTIONS. a. For purposes of this Rule, "agency cross transaction for an advisory client" means a transaction in which a person acts as an investment adviser in relation to a transaction in which the investment adviser, or any person controlling, controlled by, or under common control with such investment adviser, including an investment adviser representative, acts as a broker-dealer for both the advisory client and another person on the other side of the transaction. When acting in such capacity such person is required to be registered as a broker-dealer in this state unless excluded from the definition.b. An investment adviser effecting an agency cross transaction for an advisory client shall be in compliance with section 4224a(e)(4) of the Act if the following conditions are met: (1) The advisory client executes a written consent prospectively authorizing the investment adviser to effect agency cross transactions for such client;(2) Before obtaining such written consent from the client, the investment adviser makes full written disclosure to the client that, with respect to agency cross transactions, the investment adviser will act as broker-dealer for, receive commissions from and have a potentially conflicting division of loyalties and responsibilities regarding both parties to the transactions;(3) At or before the completion of each agency cross transaction, the investment adviser or any other person relying on this Rule sends the client a written confirmation. The written confirmation shall include: (A) a statement of the nature of the transaction,(B) the date the transaction took place,(C) an offer to furnish, upon request, the time when the transaction took place, and(D) the source and amount of any other remuneration the investment adviser received or will receive in connection with the transaction. In the case of a purchase, if the investment adviser was not participating in a distribution, or, in the case of a sale, if the investment adviser was not participating in a tender offer, the written confirmation may state whether the investment adviser has been receiving or will receive any other remuneration and that the investment adviser will furnish the source and amount of such remuneration to the client upon the client's written request;(4) At least annually, and with or as part of any written statement or summary of the account from the investment adviser, the investment adviser or any other person relying on this Rule sends each client a written disclosure statement identifying: (A) the total number of agency cross transactions during the period for the client since the date of the last such statement or summary, and(B) the total amount of all commissions or other remuneration the investment adviser received or will receive in connection with agency cross transactions for the client during the period.(5) Each written disclosure and confirmation required by this Rule must include a conspicuous statement that the client may revoke the written consent required under paragraph b (1) of this Rule at any time by providing written notice to the investment adviser.(6) No agency cross transaction may be effected in which the same investment adviser recommended the transaction to both any seller and any purchaser.c. Nothing in this Rule shall be construed to relieve an investment adviser or investment adviser representative from acting in the best interests of the client, including fulfilling their duty with respect to the best price and execution for the particular transaction for the client nor shall it relieve any investment adviser or investment adviser representative of any other disclosure obligations imposed by the Act.3.09 EXEMPTION FROM SECTION 4224a(e)(4) FOR CERTAIN BROKER-DEALERS a. For purposes of this Rule, (1) "Publicly distributed written materials" means written materials which are distributed to 35 or more persons who pay for those materials.(2) "Publicly made oral statements" means oral statements made simultaneously to 35 or more persons who pay for access to those statements.b. An investment adviser registered as a broker-dealer pursuant to Section 15 of the Securities Exchange Act of 1934 shall be exempt from section 4224a(e)(4) of the Act in connection with any transaction in relation to which that broker-dealer acts as an investment adviser: (1) solely by means of publicly distributed written materials or publicly made oral statements;(2) solely by means of written materials or oral statements not purporting to meet the objectives or needs of specific individuals or accounts;(3) solely through the issuance of statistical information containing no expressions of opinion as to the investment merits of a particular security; or(4) any combination of the foregoing services. This exemption shall apply only if the materials and oral statements disclose that, if the purchaser of the advisory communication uses the investment adviser's services in connection with the sale or purchase of a security which is a subject of the communication, the investment adviser may act as principal for its own account or as agent for another person. Compliance by the investment adviser with the foregoing disclosure requirement shall not relieve it of any other disclosure obligations under the Act.3.10 PERFORMANCE-BASED COMPENSATION EXEMPTION. a. For purposes of this Rule, (1) "Affiliate" shall have the same definition as in Section 2(a)(3) of the federal Investment Company Act of 1940.(2) "Client's independent agent" means any person who agrees to act as an investment advisory client's agent in connection with the contract, but does not include: (A) the investment adviser relying on this rule;(B) an affiliated person of the investment adviser or an affiliated person of an affiliated person of the investment adviser including an investment adviser representative;(C) an interested person of the investment adviser;(D) a person who receives, directly or indirectly, any compensation in connection with the contract from the investment adviser, an affiliated person of the investment adviser, an affiliated person of an affiliated person of the investment adviser or an interested person of the investment adviser; or(E) a person with any material relationship between himself (or an affiliated person of that person) and the investment adviser (or an affiliated person of the investment adviser) that exists, or has existed at any time during the past two years.(3) "Company" means a corporation, partnership, association, joint stock company, trust, or any organized group of persons, whether incorporated or not; or any receiver, trustee in a case under title II of the United States Code, or similar official or any liquidating agent for any of the foregoing, in their capacity as such. "Company" shall not include: (A) a company required to be registered under the federal Investment Company Act of 1940 but which is not so registered,(B) a private investment company (for purposes of this subparagraph (B), a private investment company is a company which would be defined as an investment company under Section 3(a) of the federal Investment Company Act of 1940 but for the exception from that definition provided by Section 3(c)(1) of that act),(C) an investment company registered under the federal Investment Company Act of 1940, or(D) a business development company as defined in Section 202(a)(22) of the federal Investment Advisers Act of 1940, unless each of the equity owners of any such company, other than the investment adviser entering into the contract, is a natural person or company within the meaning of paragraph a (3) of this Rule.(4) "Interested person" means: (A) any member of the immediate family of any natural person who is an affiliated person of the investment adviser;(B) any person who knowingly has any direct or indirect beneficial interest in, or who is designated as trustee, executor, or guardian of any legal interest in, any security issued by the investment adviser or by a controlling person of the investment adviser if that beneficial or legal interest exceeds: (i) one tenth of one percent of any class of outstanding securities of the investment adviser or a controlling person of the investment adviser, or(ii) five percent of the total assets of the person seeking to act as the client's independent agent; or(C) any person or partner or employee of any person who, at any time since the beginning of the last two years, has acted as legal counsel for the investment adviser.b. Notwithstanding section 4224a(g)(1) of the Act, an investment adviser may enter into, extend or renew an investment advisory contract which provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds, or any portion of the funds, of the client if the conditions in paragraphs c through h of this Rule are met.c. The client entering into the contract must be: (1) a natural person or a company who, immediately after entering into the contract, has at least $ 500,000 under the management of the investment adviser or(2) a person who the investment adviser and its investment adviser representatives reasonably believe, immediately before entering into the contract, is a natural person or a company whose net worth, at the time the contract is entered into, exceeds $ 1,000,000, The net worth of a natural person may include assets held jointly with that person's spouse.d. The compensation paid to the investment adviser with respect to the performance of any securities over a given period must be based on a formula with the following characteristics: (1) In the case of securities for which market quotations are readily available within the meaning of Rule 2a-4(a)(1) under the Investment Company Act of 1940 (Definition of "Current Net Asset Value" for Use in Computing Periodically the Current Price of Redeemable Security), 17 C.F.R. 270.2 a- 4(a)(1), the formula must include the realized capital losses and unrealized capital depreciation of the securities over the period;(2) in the case of securities for which market quotations are not readily available within the meaning of Rule 2a-4(a)(1) under the Investment Company Act of 1940, 17 C.F.R. 270.2 a- 4(a)(1), the formula must include: (A) the realized capital losses of securities over the period, and(B) if the unrealized capital appreciation of the securities over the period is included, the unrealized capital depreciation of the securities over the period; and(3) the formula must provide that any compensation paid to the investment adviser under this rule is based on the gains less the losses (computed in accordance with subdivisions (1) and (2) of this paragraph) in the client's account for a period of not less than one year.e. Before entering into the advisory contract and in addition to the requirements of Form ADV, the investment adviser must disclose in writing to the client or the client's independent agent all material information concerning the proposed advisory arrangement, including the following: (1) That the fee arrangement may create an incentive for the investment adviser to make investments that are riskier or more speculative than would be the case in the absence of a performance fee;(2) Where relevant, that the investment adviser may receive increased compensation with regard to unrealized appreciation as well as realized gains in the client's account;(3) The periods which will be used to measure investment performance throughout the contract and their significance in the computation of the fee;(4) The nature of any index which will be used as a comparative measure of investment performance, the significance of the index, and the reason the investment adviser believes that the index is appropriate; and(5) Where the investment adviser's compensation is based in part on the unrealized appreciation of securities for which market quotations are not readily available within the meaning of rule 2a-4(a)(1) under the Investment Company Act of 1940, 17 C.F.R. 270.2 a- 4(a)(1), how the securities will be valued and the extent to which the valuation will be independently determined.f. The investment adviser (and any investment adviser representative) who enters into the contract must reasonably believe, immediately before entering into the contract that the contract represents an arm's length arrangement between the parties and that the client (or in the case of a client which is a company as defined in paragraph a(3) of this rule, the person representing the company), alone or together with the client's independent agent, understands the proposed method of compensation and its risks. The representative of a company may be a partner, director, officer or an employee of the company or the trustee, where the company is a trust, or any other person designated by the company or trustee, but must satisfy the definition of client's independent agent set forth in subsection (a)(2) of this Rule.g. Any person entering into or performing an investment advisory contract under this Rule is not relieved of any obligations under section 4224a or any other applicable provision of the Act or any rule or order thereunder.h. Nothing in this Rule shall relieve a client's independent agent from any obligation to the client under applicable law.3.11 TRANSACTIONS DEEMED NOT TO BE ASSIGNMENTS. For purposes of section 4224a(g)(2) of the Act, a transaction which does not result in a change of actual control or management of an investment adviser is not an assignment.
3.12 INVESTMENT ADVISER BROCHURE RULE. a. GENERAL REQUIREMENTS. Unless otherwise provided in this Rule, an investment adviser, registered or required to be registered pursuant to section 4213(f) of the Act shall, in accordance with the provisions of this section, furnish each advisory client and prospective advisory client with a written disclosure statement which may be a copy of Part II of its Form ADV or written documents containing at least the information then so required by Part II of Form ADV, or such other information as the Commissioner may require.
b. DELIVERY. (1) An investment adviser, except as provided in paragraph (2), shall deliver the statement required by this section to an advisory client or prospective advisory client: (A) not less than 48 hours prior to entering into any investment advisory contract with such client or prospective client, or(B) at the time of entering into any such contract, if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract.(2) Delivery of the statement required by paragraph (1) need not be made in connection with entering into: (A) an investment company contract, or(B) a contract for impersonal advisory services.c. OFFER TO DELIVER. (1) An investment adviser, except as provided in subdivision (2), annually shall, without charge, deliver or offer in writing to deliver upon written request to each of its advisory clients the statement required by this paragraph.(2) The delivery or offer required by subdivision (1) need not be made to advisory clients receiving advisory services solely pursuant to: (A) an investment company contract, or(B) a contract for impersonal advisory services requiring a payment of less than $ 200.00.(3) With respect to an advisory client entering into a contract or receiving advisory services pursuant to a contract for impersonal advisory services which requires a payment of $ 200.00 or more, an offer of the type specified in subdivision (1) shall also be made at the time of entering into an advisory contract.(4) Any statement requested in writing by an advisory client pursuant to an offer required by this subsection must be mailed or delivered within seven days of the receipt of the request.d. OMISSION OF INAPPLICABLE INFORMATION. If an investment adviser renders substantially different types of investment advisory services to different advisory clients, any information required by Part II of Form ADV may be omitted from the statement furnished to an advisory client or prospective advisory client if such information is applicable only to a type of investment advisory service or fee which is not rendered or charged, or proposed to be rendered or charged, to that client or prospective client.
e. OTHER DISCLOSURES. Nothing in this Rule shall relieve any investment adviser from any obligation pursuant to any provision of the Act or the rules and regulations thereunder or other federal or state law to disclose any information to its advisory clients or prospective advisory clients not specifically required by this Rule.
f. DEFINITIONS. For the purpose of this Rule:
(1) "Contract for impersonal advisory services" means any contract relating solely to the provision of investment advisory services: (A) By means of written material or oral statements which do not purport to meet the objectives or needs of specific individuals or accounts;(B) Through the issuance of statistical information containing no expression of opinion as to the investment merits of a particular security; or(C) Any combination of the foregoing services.(2) "Entering into", in reference to an investment advisory contract, does not include an extension or renewal without material change of any such contract which is in effect immediately prior to such extension or renewal.(3) "Investment company contract" means a contract with an investment company registered under the Investment Company Act of 1940 which meets the requirements of Section 15(c) of that Act.3.13 WRAP FEE BROCHURE. a. For purposes of this rule: (1) "Wrap Fee Program" means any program under which any client is charged a specified fee or fees not based directly upon transactions in a client's account for investment advisory services (which may include portfolio management or advice concerning the selection of other investment advisers) and execution of client transactions.(2) "Portfolio manager" means an investment adviser who determines or recommends securities transactions for any portion of a client's portfolio.(3) "Sponsor" means any investment adviser that is compensated under a wrap fee program for administering, organizing or sponsoring the program, or for selecting or providing advice to clients regarding the selection of other investment advisers in the program.b. Applicability of disclosure Requirements. (1) An investment adviser that sponsors a wrap fee program shall, in lieu of the written disclosure statement required by Rule 3.12 of this regulation, furnish each client or prospective client of a wrap fee program, a separate written disclosure statement containing at least the information required by Part II of form ADV. Any information included in such disclosure statement that is not specifically required by Form ADV, Part II, should be limited to information concerning wrap fee programs for which the investment adviser is required to furnish disclosure statements under this paragraph.(2) If an investment adviser sponsors or organizes more than one wrap fee program, the investment adviser may omit from the disclosure statement furnished to clients and prospective clients of a particular wrap fee program or programs any information required by Form ADV, Part II, that is not applicable to clients or prospective clients of that wrap fee program or programs.(3) An investment adviser need not furnish the written disclosure statement required by paragraph (b)(1) above, to clients and prospective clients of a wrap fee program if another investment adviser is required to furnish and does furnish the written disclosure statement to all clients and prospective clients of the wrap fee program.c. Filing and Delivery. The wrap fee disclosure statement shall be attached to Form ADV, Part II and filed with the Commissioner. If the investment adviser prepared separate wrap fee brochures for clients of different programs, each brochure shall be filed with the Commissioner. An investment adviser shall deliver the statement required by this section to a client or prospective client of a wrap fee program: (1) not less than 48 hours prior to entering into a wrap fee program contract with a client or prospective client, or(2) at the time of entering into any wrap fee program contract, if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract.d. Amendments. If information contained in the wrap fee disclosure statement becomes inaccurate in a material manner, the investment adviser shall promptly file an amendment to Form ADV with the Commissioner correcting the information. An investment adviser may update the wrap fee disclosure statement by using a supplement or "sticker" that indicates what information is being added or updated and states the new or revised information, as long as the resulting brochure is readable. Nonmaterial changes shall be filed within 90 days after the investment adviser's fiscal year end.3.14 WITHDRAWAL OF INVESTMENT ADVISER AND INVESTMENT ADVISER REPRESENTATIVE REGISTRATIONS. a. The application for withdrawal of registration as an investment adviser shall be filed upon Form ADV-W (Notice of Withdrawal from Registration as Investment Adviser) ( 17 C.F.R. 279.2 ) with the Commissioner or with a central registration depository system designated by the Commissioner.b. The application for withdrawal of registration as an investment adviser representative pursuant to section 4217(b) of the Act shall be filed upon Form U-5 (Uniform Notice of Withdrawal of Securities Industry Registration) with the Commissioner or with a central registration depository system designated by the Commissioner.3.15 RECORD-KEEPING REQUIREMENTS FOR INVESTMENT ADVISERS. a. Every investment adviser registered or required to be registered under the Act shall make and keep true, accurate and current the following books, ledgers and records: (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 adviser for the purchase or sale of any security, of any instruction received by the investment adviser 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. Such memoranda shall show the terms and conditions of the order, instruction, modification or cancellation; shall identify the person connected with the investment adviser who recommended the transaction to the client and the person who placed such order; and shall show the account for which entered, the date of entry, and the bank or broker-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 adviser.(5) All bills or statements (or copies thereof, paid or unpaid, relating to the business of the investment adviser as such.(6) All trial balances, financial statements, and internal audit working papers relating to the business of such investment adviser.(7) Originals of all written communications received and copies of all written communications sent by such investment adviser relating to: (A) any recommendation made or proposed to be made and any advice given or proposed to be given,(B) any receipt, disbursement or delivery of funds or securities, or(C) the placing or execution of any order to purchase or sell any security; provided, however, (i) that the investment adviser 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 adviser, and(ii) that if the investment adviser sends any notice, circular or other advertisement offering any report, analysis, publication or other investment advisory service to more than 10 persons, the investment adviser shall not be required to keep a record of the names and addresses of the persons to whom it was sent; except that if such notice, circular or advertisement is distributed to persons named on any list, the investment adviser shall retain with the copy of such notice, circular or advertisement a memorandum describing the list and the source thereof.(8) A list or other record of all accounts in which the investment adviser 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 adviser, or copies thereof.(10) All written agreements (or copies thereof) entered into by the investment adviser with any client or otherwise relating to the business of such investment adviser as such.(11) A copy of each notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication, including by electronic media, recommending the purchase or sale of a specific security that the investment adviser circulates or distributes, directly or indirectly, to two or more persons (other than persons connected with such investment adviser), and if such notice circular, advertisement, newspaper article, investment letter, bulletin or other communication recommends the purchase or sale of a specific security and does not state the reasons for such recommendation, a memorandum of the investment adviser indicating the reasons therefor.(12)(A) A record of every transaction in a security in which the investment adviser or any advisory representative of such investment adviser 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 adviser nor any advisory representative of the investment adviser has any direct or indirect influence or control, and(ii) transactions in securities which are direct obligations of the United States. Such 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. Such 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 adviser or 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 term "advisory representative" shall mean any partner, officer or director of the investment adviser; any employee who makes any recommendation, who participates in the determination of which recommendation shall be made, or whose functions or duties relate to the determination of which recommendation shall be made; any employee who, in connection with such person's duties, obtains any information concerning which securities are being recommended prior to the effective dissemination of such recommendations or of the information concerning such recommendations; and any of the following persons who obtain information concerning securities recommendations being made by such investment adviser prior to the effective dissemination of such recommendations or of the information concerning such recommendations: (i) any person in a control relationship to the investment adviser,(ii) any affiliated person of such controlling person, and(iii) any affiliated person of such affiliated person. "Control" shall mean 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 such company. Any person who owns beneficially, either directly or through one or more controlled companies, more than 25% of the voting securities of a company shall be presumed to control such company.
(C) An investment adviser shall not be deemed to have violated the provisions of this paragraph because of his failure to record securities transactions of any investment adviser representative if he establishes that he 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) above, where the investment adviser is primarily engaged in a business or businesses other than advising registered investment companies or other advisory clients, a record must be maintained of every transaction in a security in which the investment adviser or any advisory representative of such investment adviser 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 adviser nor any advisory representative of the investment adviser has any direct or indirect influence or control; and(ii) transactions in securities which are direct obligations of the United States. Such 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. Such 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 adviser or 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 adviser is "primarily engaged in a business or businesses other than advising registered investment companies or other advisory clients" when, for each of its most recent three fiscal years or for the period of time since organization, whichever is lesser, the investment adviser 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 term "advisory representative", when used in connection with a company primarily engaged in a business or businesses other than advising registered investment companies or other advisory clients, shall mean any partner, officer, director or employee of the investment adviser who makes any recommendation, who participates in the determination of which recommendation shall be made, or whose functions or duties relate to the determination of which recommendation shall be made, or who, in connection with such person's duties, obtains any information concerning which securities are being recommended prior to the effective dissemination of such recommendations or of the information concerning such recommendations; and any of the following persons who obtain information concerning securities recommendations being made by such investment adviser prior to the effective dissemination of such recommendations or of the information concerning such recommendations: (i) any person in a control relationship to the investment adviser,(ii) any affiliated person of such controlling person, and(iii) any affiliated person of such affiliated person. "Control" shall have the same meaning as that set forth in Section 2(a)(9) of the Investment Company Act of 1940, as amended.
(D) An investment adviser shall not be deemed to have violated the provisions of this subdivision (13) because of the failure to record securities transactions of any advisory representative if the investment adviser establishes that the 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 thereof, given or sent to any client or prospective client of such investment adviser in accordance with the provisions of Rule 3.12, and a record of the dates that each written statement, and each amendment or revision thereof 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 adviser by means of a solicitor to whom a cash fee was paid by the adviser (A) evidence of a written agreement to which the adviser is a party related to the payment of such fee;(B) a signed and dated acknowledgment of receipt from the client evidencing the client's receipt of the investment adviser'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, acknowledgment 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 rule, the term "solicitor" shall mean any person or entity who, for compensation, acts as an agent of an investment adviser 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 any or all managed accounts or securities recommendations in any notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication that the investment adviser circulates or distributes, directly or indirectly, to two or more persons (other than persons connected with such investment adviser); provided, however, that, 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 paragraph.(17) A file containing a copy of all written communications received or sent regarding any litigation involving the investment adviser or any investment adviser 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 such client.(19) Written procedures to supervise the activities of employees and investment adviser representatives that are reasonable designed to achieve compliance with applicable securities and laws and regulations.(20) A file containing a copy of each document (other than 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 adviser representative as that term is defined in subdivision (a)(12)(A) of this Rule, which file should contain, but is not limited to, all applications, amendments, renewal filings, and correspondence.b. If an investment adviser subject to paragraph (a) of this Rule has custody or possession of securities or funds of any client, the records required to be made and kept under paragraph (a) above 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 such accounts.(2) A separate ledger account for each such client showing all purchases, sales, receipts and deliveries of securities, the date and price of each such purchase and sale, and all debits and credits.(3) Copies of confirmations of all transactions effected by or for the account of any such client.(4) A record for each security in which any such client has a position, which record shall show the name of each such client having any interest in each security, the amount or interest of each such client, and the location of each such security.c. Every investment adviser subject to paragraph (a) of this Rule who renders any investment supervisory 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 adviser, make and keep true, accurate and current: (1) Records showing separately for each such client the securities purchased and sold, and the date, amount and price of each such purchase and sale.(2) For each security in which any such client has a current position, information from which the investment adviser can promptly furnish the name of each such client, and the current amount or interest of such client.d. Any books or records required by this Rule may be maintained by the investment adviser in such manner that the identity of any client to whom the investment adviser renders investment supervisory services is indicated by numerical or alphabetical code or some similar designation.e. Every investment adviser subject to subsection (a) of this Rule shall preserve the following records in the manner prescribed: (1) All books and records required to be made under the provisions of paragraphs a to c (1), inclusive of this Rule (except for books and records required to be made under the provisions of paragraphs a (11) and a (15) of this rule), 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 adviser.(2) Partnership articles and any amendments thereto, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor, shall be maintained in the principal office of the investment adviser and preserved until at least three years after termination of the enterprise.(3) Books and records required to be made under the provisions of paragraphs a(11) and a(15) of this Rule shall be maintained and preserved in an easily accessible place for a period of not less than five years, the first two years in the principal office of the investment adviser, from the end of the fiscal year during which the investment adviser 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) Notwithstanding other record preservation requirements of this Rule, the following records or copies shall be required to be maintained at the business location of the investment adviser from which the customer or client is being provided or has been provided with investment advisory services: (A) records required to be preserved under paragraphs (a)(3), (a)7-10, (a)14-15, (a)17-19, (b) and (c) inclusive, of this Rule, and(B) the records or copies require under the provision of paragraphs (a)(11) and (a)(16) of this Rule which records or related records identify the name of the investment adviser representative providing investment advice form 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 subdivision (e) of this Rule.f. An investment adviser subject to subsection (a) of this Rule, before ceasing to conduct or discontinuing business as an investment adviser shall arrange for and be responsible for the preservation of the books and records required to be maintained and preserved under this Rule for the remainder of the period specified in this Rule, and shall notify the Commissioner in writing of the exact address where such books and records will be maintained during such period.g.(1) The records required to be maintained and preserved pursuant to this Rule may be immediately produced or reproduced by photograph on film or, as provided in paragraph f(2) below, on magnetic disk, tape or other computer storage medium, and be maintained and preserved for the required time in that form. If records are produced or reproduced by photographic film or computer storage medium, the investment adviser 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 provide, and promptly provide, any facsimile, enlargement of film or computer printout or copy of the computer storage medium which the Commissioner 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 and preservation 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 Commissioner's examination of its records pursuant to section 4231(a) of the Act, facilities for immediate, easily readable projection of the film and for producing easily readable facsimile enlargements.(2) Pursuant to paragraph (g)(1) an investment adviser may maintain and preserve on computer tape or disk or other computer storage medium records which, in the ordinary course of the investment adviser's business, are created by the investment adviser on electronic media or are received by the adviser solely on electronic media or by electronic data transmission.h. For purposes of this Rule, "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 adviser, the client has directed or approved the purchase or sale of a definite amount of the particular security.i. Any book or other record made, kept, maintained and preserved in compliance with Rules 17a-3 [ 17 C.F.R. 240.17a-3 ] and 17a-4 [ 17 C.F.R. 240.17a-4 ] under the Securities Exchange Act of 1934, which is substantially the same as the book or record required to be made, kept, maintained and preserved under this Rule shall be deemed to be made, kept, maintained and preserved in compliance with this Rule.j. Every investment adviser registered or required to be registered in this state and that has its principal place of business in a state other than this state shall be exempt from the requirements of this section, provided the investment adviser is licensed in such state and is in compliance with such state's recordkeeping requirements.3.16 FINANCIAL REPORTING REQUIREMENTS FOR INVESTMENT ADVISERS a. Every registered investment adviser who has custody of client funds, assets or securities or requires payment of advisory fees 6 or more months in advance and in excess of $ 500 per client shall file with the Commissioner an audited balance sheet as of the end of the investment adviser's fiscal year. (1) Each balance sheet filed pursuant to this Rule must be: (A) Examined in accordance with generally accepted auditing standards and prepared in conformity with generally accepted accounting principles;(B) Audited by an independent public accountant or an independent certified public accountant; and(C) Accompanied by an opinion of the accountant as to the report of financial position, and by a note stating the principles used to prepare it, the basis of included securities, and any other explanations required for clarity.b. Every registered investment adviser who has discretionary authority over client funds or securities, but not custody, shall file with the Commissioner a balance sheet, which need not be audited, but which must be prepared in accordance with generally accepted accounting principles and represented by the investment adviser or the person who prepared the statement as true and accurate, as of the end of the investment adviser's fiscal year.c. The financial statements required by this Rule shall be filed with the Commissioner within 90 days following the end of the investment adviser's fiscal year.3.17 FILING OF AMENDMENTS a. An amendment required by section 4229(d) of the Act for an investment adviser shall be made on Form ADV in the manner prescribed by that form. Any amendment to Form ADV shall be filed with the Commissioner within the period of time specified in the instructions to that form relating to filings made with the Securities and Exchange Commission.b. Any amendment required to be filed under paragraph a of this Rule shall include only a notarized execution page (Form ADV, part 1, page 1) and the pages to be amended. The investment adviser shall circle only the amended questions. The investment adviser shall not file Form ADV in its entirety in lieu of an amendment which complies with this Rule.c. Any amendment required by section 4229(d) of the Act for an investment adviser representative shall be made on Form U-4 in the manner prescribed by that form.3.18 ADVERTISEMENTS BY INVESTMENT ADVISERS OR INVESTMENT ADVISER REPRESENTATIVES a. It shall constitute a fraudulent practice within the meaning of section 4224a(e) of the Act, for any investment adviser or investment adviser representative, directly or indirectly, to publish, circulate or distribute any advertisement: (1) Which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or investment adviser representative or concerning any advice, analysis, report or other service rendered by such investment adviser or investment adviser representative; or(2) Which refers, directly or indirectly, to past specific recommendations of such investment adviser or investment adviser representative which were or would have been profitable to any person; provided, however, that this shall not prohibit an advertisement which sets out or offers to furnish a list of all recommendations made by such investment adviser or investment adviser representative within the immediately preceding period of not less than one year if such advertisement, and such list if it is furnished separately: (A) States the name of each such security recommended, the date and nature of each such recommendation (e.g., whether to buy, sell or hold), the market price at that time, the price at which the recommendation was to be acted upon, and the market price of each such security as of the most recent practicable date; and(B) Contains the following cautionary legend on the first page thereof in print or type as large as the largest print or type used in the body or text thereof, "It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list"; or(3) Which represents, directly or indirectly, that any graph, chart, formula or other device being offered can in and of itself be used to determine which securities to buy or sell, or when to buy or sell them; or which represents, directly or indirectly, that any graph, chart, formula or other device being offered will assist any person in making his own decisions as to which securities to buy or sell, or when to buy or sell them, without prominently disclosing in such advertisement the limitations thereof and the difficulties with respect to its use; or(4) Which contains any statement to the effect that any report, analysis, or other service will be furnished free or without charge, unless such report, analysis or other service actually is or will be furnished entirely free and without any condition or obligation, directly or indirectly; or(5) Which contains any untrue statement of a material fact, or which otherwise false or misleading; or(6) Which states that the Commissioner or the Department of Banking, Insurance, Securities and Health Care Administration has approved any advertisement.b. For the purposes of this Rule the term "advertisement" shall include any notice, circular, letter or other written or electronic communication addressed to more than one person, or any notice or other announcement in any publication or by radio, television, electronic network or other public media which offers: (1) Any analysis, report, or publication concerning securities, or which is to be used in making any determination as to when to buy or sell any security, or which security to buy or sell; or(2) Any graph, chart, formula or other device to be used in making any determination as to when to buy or sell any security, or which security to buy or sell; or(3) any other investment advisory service with regard to securities.21-002 Code Vt. R. 21-030-002-X
Effective Date: January 24, 1996 (Secretary of State Rule Log #96-02)
AMENDED: January 1, 2000 (Secretary of State Rule Log #99-69)
(*Rule No. changed - formerly Rule No. 21 000 005) Statutory Authority: 9 V.S.A. §§ 4217, 4224 and 4237