[30 Pa.B. 2237]
[Continued from previous Web Page] § 303.042. Investment adviser capital requirements.
(a) [Except as set forth in paragraphs (1)--(3), an] Every investment adviser registered or required to be registered under section 301 of the act (70 P. S. § 1-301) shall maintain [a minimum net capital of $5,000 or a minimum tangible net worth of $12,500] at all times the following net worth requirements:
(1) An investment adviser [who is also registered as a broker-dealer under section 301 of the act (70 P. S. § 1-301) shall maintain a minimum net capital of $5,000] that has its principal place of business in a state other than this Commonwealth shall maintain the net worth required by the state where the investment adviser maintains its principal place of business if the investment adviser currently is licensed in that state and is in compliance with that state's net worth requirements.
(2) [An] Except as provided in subsection (e), an investment adviser [who holds custody of clients' funds or securities and who is not registered as a broker-dealer shall maintain a minimum net capital of $50,000 or a minimum tangible net worth of $125,000] that has its principal place of business in this Commonwealth and also is registered as a broker-dealer under section 301 of the act shall maintain at all times a minimum net capital of $25,000.
(3) An investment adviser [who is vested with discretionary authority with respect to clients' investments and who is not registered as a broker-dealer shall maintain a minimum net capital of $20,000 or a minimum tangible net worth of $50,000] that has its principal place of business in this Commonwealth and has custody of client funds or securities shall maintain at all times a minimum net worth of $35,000.
(4) An investment adviser that has its principal place of business in this Commonwealth and has discretionary authority over client funds or securities but does not have custody of client funds or securities shall maintain at all times a minimum net worth of $10,000. An investment adviser will not be deemed to be exercising discretion and subject to the requirements of this paragraph when it places trade orders with a broker-dealer under a third party trading agreement if the following requirements are met:
(i) The investment adviser has executed a separate investment adviser contract exclusively with its clients that acknowledges that a third party agreement will be executed to allow the investment adviser to effect securities transactions for the client in the client's broker-dealer account.
(ii) The investment adviser contract specifically states that the client does not grant discretionary authority to the investment adviser and the investment adviser, in fact, does not exercise discretion with respect to the account.
(iii) A third party trading agreement is executed between the investment adviser, the client and the broker-dealer which specifically limits the investment adviser's authority in the client's broker-dealer account to the placement of trade orders and deduction of investment adviser fees.
(5) An investment adviser that has its principal place of business in this Commonwealth and accepts prepayment of advisory fees of more than 6 months in advance and more than $500 per client shall maintain at all times a positive net worth.
(b) [Unless otherwise exempted, as] As a condition of the right to continue to transact business in this Commonwealth, an investment adviser registered [or required to be registered] under the act shall [immediately] notify, by the close of business on the next business day, the Commission if the investment adviser's total net [capital or tangible net] worth is less than the minimum required net [capital or minimum required tangible net] worth. Within 24 hours after transmitting the notice, the investment adviser shall file a report of its financial condition including the following:
* * * * * (2) A computation of net [capital or tangible net] worth [(See subsection (c))].
* * * * * (6) A statement [of the approximate] as to the number of client accounts.
(c) For the purpose of this section, the following terms have the following meanings:
[(1) Net capital--Shall have the meaning set forth in 17 CFR 240.15c3-1 (relating to net capital requirements for brokers or dealers), promulgated under the Securities Exchange Act of 1934 (15 U.S.C.A. §§ 78a--798kk).
(2) Net worth--An excess of assets over liabilities, as determined by generally accepted accounting principles.
(3) Tangible net worth--The net worth of an investment adviser registered or required to be registered under the act reduced by the following:
(i) Prepaid expenses except items properly classified as current assets under generally accepted accounting principles.
(ii) Deferred charges.
(iii) Goodwill, franchises, organizational expenses, unamortized debt discount and expense and other assets of an intangible nature.
(iv) Home, furnishings and automobile--less indebtedness secured by these assets but only to the extent that the indebtedness does not exceed the carrying value of the assets--and 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.]
Custody--A person is deemed to have custody of client funds or securities if the person directly or indirectly holds clients funds or securities, has any authority to obtain possession of them or has the ability to appropriate them.
Net capital--The meaning set forth in 17 CFR 240.15c3-1 (relating to net capital requirements for brokers or dealers), promulgated under the Securities Exchange Act of 1934 (15 U.S.C.A. §§ 78a--78kk).
Net worth--The excess of assets over liabilities as determined by generally accepted accounting principles reduced by the following:
(i) Prepaid expenses except items properly classified as current assets under generally accepted accounting principles.
(ii) Deferred charges.
(iii) Goodwill, franchises, organizational expenses, patents, copyrights, marketing rights, unamortized debt discount and expense and all other assets of an intangible nature.
(iv) Home furnishings, automobiles and other personal items not readily marketable in the case of an individual.
(v) Advances or loans to stockholders and officers in the case of a corporation; members and managers in the case of a limited liability company; and advances or loans to partners in the case of a partnership.
Principal place of business--The meaning set forth in 17 CFR 275.203A-3(c) (relating to definitions) promulgated under the Investment Advisers Act of 1940 (15 U.S.C.A. §§ 80b-1--80b-21).
(d) For investment advisers registered or required to be registered under the act [who maintain a minimum tangible net worth requirement rather than a minimum net capital requirement], the Commission may require that a current appraisal be submitted [in order] to establish the worth of an asset being calculated under the [tangible] net worth formulation.
(e) Subsection (a)(2) does not apply to an investment adviser that has its principal place of business in this Commonwealth and also is registered as a broker-dealer under section 15 of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78o) if the broker-dealer is one of the following:
(1) Subject to, and in compliance with, SEC Rule 15c3-1.
(2) A member of a National securities exchange whose members are exempt from SEC Rule 15c3-1 under subsection (b)(2) thereof and the broker-dealer is in compliance with all rules and practices of the exchange imposing requirements with respect to financial responsibility and the segregation of funds or securities carried for the account of customers.
§ 303.051. Surety bonds.
(a) [An issuer who employs agents in connection with any security or transaction not exempted by section 202 or 203 of the act (70 P. S. § 1-202 or § 1-203) shall furnish and maintain for the entire registration period a surety bond in the amount of $10,000 issued by a corporate surety authorized to transact business in this Commonwealth.] The following applies with respect to the filing of a surety bond with the Commission by an investment adviser:
(1) An investment adviser that has its principal place of business in this Commonwealth and does not meet the minimum net worth requirements of § 303.042 (relating to investment adviser capital requirements) may, by order of the Commission, have and maintain a surety bond in the amount of the net worth deficiency rounded up to the nearest $5,000. The surety bond shall be [submitted to] filed with the Commission on Uniform Surety Bond Form (Form U-SB) or successor form thereto[.]; shall be subject to the claims of all clients of the investment adviser regardless of the client's state of residence; and shall be issued by a person licensed to issue surety bonds in this Commonwealth.
(2) An investment adviser that has its principal place of business in a state other than this Commonwealth shall comply with paragraph (1) unless the investment adviser meets the following qualifications:
(i) Is registered as an investment adviser in that state.
(ii) Is in compliance with the applicable net worth and bonding requirements of the state in which it maintains its principal place of business.
(3) For purposes of this section, the term ''principal place of business'' has the same meaning as set forth in 17 CFR 275.203A-3(c) (relating to definitions) promulgated under the Investment Advisers Act of 1940 (15 U.S.C.A. §§ 80b-1--80b-21).
* * * * * (b) A broker-dealer [or investment adviser] registered under the act but not registered as a broker or dealer under the Securities Exchange Act of 1934 (15 U.S.C.A. §§ 78a--78kk) may, by order of the Commission, be permitted to have and maintain for the registration period a surety bond in the amount[, of the type, and in the form described in subsection (a) in order to facilitate compliance with the broker-dealer minimum net capital requirements as set forth in § 303.041 (relating to broker-dealer capital requirements) or the investment adviser minimum net capital or minimum net worth requirements set forth in § 303.042 (relating to investment adviser capital requirements] of the net capital deficiency rounded up to the nearest $5,000. The surety bond shall:
(1) Be filed with the Commission on Form U-SB or successor form thereto.
(2) Be subject to the claims of all clients of the broker-dealer regardless of the client's state of residence.
(3) Be issued by a person licensed to issue surety bonds in this Commonwealth.
(c) [The Commission may require an issuer,] Upon request of the Commission, a broker-dealer or investment adviser [to demonstrate evidence of the existence of a surety bond at the time of initial registration and at another time the Commission may request] shall provide evidence of the existence of a surety bond.
[(d) The Commission may, upon written application, exempt an issuer from the requirements of this section, or modify its application if the Commission finds that, because of the special nature of the person's business, financial condition, and the safeguards established by it for the protection of investors' funds, it is not necessary or appropriate in the public interest or for the protection of investors that the person be subject to this section.]
CHAPTER 304. POST-REGISTRATION PROVISIONS § 304.012. Investment adviser required records.
(a) Every investment adviser registered [or required to be registered] under the act shall make and keep [the books, ledgers and records required to be maintained as described in Rules 204-2 and 204-3 (17 CFR 275.204-2 and 275.204-3) adopted under the Investment Advisers Act of 1940 (15 U.S.C.A. §§ 80b-1--80b-21).] 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. The 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 the order; and shall show the account for which entered, the date of entry, and the bank, broker-dealer by or through whom executed when appropriate. Orders entered under 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 of), paid or unpaid, relating to the investment adviser's business as an investment adviser.
(6) All trial balances, financial statements, net worth computation and internal audit working papers relating to the investment adviser's business as an investment adviser. For purposes of this subsection, the term ''financial statements'' means a balance sheet prepared in accordance with generally accepted accounting principles, an income statement and a cash flow statement. The net worth computation means the net worth required by § 303.042 (relating to investment adviser capital requirements), if any.
(7) Originals of all written communications received and copies of all written communications sent by the investment adviser relating to one or more of the following:
(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.
(iii) The placing or execution of any order to purchase or sell any security, except that an investment adviser:
(A) May 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.
(B) With respect to any notice, circular or other advertisement offering any report, analysis, publication or other investment advisory service sent by the investment adviser to more than 10 persons (including transmission by electronic means), may not be required to keep a record of the names and addresses of the persons to whom it was sent. However, if the notice, circular or advertisement is distributed to persons named on any list, the investment adviser shall retain with the copy of the notice, circular or advertisement a memorandum describing the list and its source.
(8) A list or other record of all accounts which list identifies the accounts in which the investment adviser is vested with any discretionary power with respect to the funds, securities or transactions of any client.
(9) A copy of all powers of attorney and other evidences of the granting of any discretionary authority by any client to the investment adviser.
(10) A copy in writing of each agreement entered into by the investment adviser with any client, and all other written agreements otherwise relating to the investment adviser's business as an investment adviser.
(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 adviser circulates or distributes, directly or indirectly, to two or more persons (other than persons connected with the investment adviser), 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) Records of transactions as follows:
(i) A record of every transaction in a security in which the investment adviser or investment adviser representative of the investment adviser has, or by reason of any transaction acquires, any direct or indirect beneficial ownership except the following:
(A) Transactions effected in any account over which neither the investment adviser nor any investment adviser representative of the investment adviser has any direct or indirect influence or control.
(B) Transactions in securities which are direct obligations of the United States. The record shall state:
(I) The title and amount of the security involved; the date and nature of the transaction (that is purchase, sale or other acquisition or disposition).
(II) The price at which it was effected.
(III) The name of the broker-dealer or bank with or through whom the transaction was effected.
(ii) The record may also contain a statement declaring that the reporting or recording of any transaction will not be construed as an admission that the investment adviser or investment adviser representative has any direct or indirect beneficial ownership in the security.
(iii) A transaction shall be recorded within 10 days after the end of the calendar quarter in which the transaction was effected.
(iv) For purposes of this paragraph, the following terms have the following meanings:
Control--The power to exercise a controlling influence over the management or policies of a company, unless the power is solely the result of an official position with the company. A 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 the company.
Investment adviser representative--A partner, officer or director of the investment adviser; any employe who participates in any way in the determination of which recommendations shall be made; any employe of the investment adviser who, in connection with assigned 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 adviser prior to the effective dissemination of the recommendations:
(I) Any person in a control relationship to the investment adviser.
(II) Any affiliated person of a controlling person.
(III) Any affiliated person of an affiliated person.
(v) An investment adviser shall implement adequate procedures and use reasonable diligence to obtain promptly reports of all transactions required to be recorded.
(13) Records of transactions by investment advisers primarily engaged in a business other than advising clients as follows:
(i) Notwithstanding paragraph (12), when the investment adviser is primarily engaged in a business or businesses other than advising investment advisory clients, a record shall be maintained of every transaction in a security in which the investment adviser or an investment adviser representative of the investment adviser has, or by reason of any transaction acquires, any direct or indirect beneficial ownership, except under the following conditions:
(A) Transactions effected in any account over which neither the investment adviser nor any investment adviser representative of the investment adviser has any direct or indirect influence or control.
(B) Transactions in securities which are direct obligations of the United States. The record shall state:
(I) The title and amount of the security involved.
(II) The date and nature of the transaction (that is, purchase, sale, or other acquisition or disposition).
(III) The price at which it was effected; and the name of the broker-dealer or bank with or through whom the transaction was effected.
(ii) The record may also contain a statement declaring that the reporting or recording of any transaction will not be construed as an admission that the investment adviser or investment adviser representative has any direct or indirect beneficial ownership in the security.
(iii) A transaction shall be recorded within 10 days after the end of the calendar quarter in which the transaction was effected.
(iv) An investment adviser is ''primarily engaged in a business or businesses other than advising investment advisory clients'' when, for each of its most recent 3 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 the following:
(A) Its total sales and revenues.
(B) Its income (or loss) before income taxes and extraordinary items, from the other business or businesses.
(v) For purposes of this paragraph, the following terms have the following meanings:
Control--The power to exercise a controlling influence over the management or policies of a company, unless the power is solely the result of an official position with such company. A 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 the company.
Investment adviser representative--When used in connection with a company primarily engaged in a business or businesses other than advising investment advisory clients, the term means any partner, officer, director or employe of the investment adviser who participates in any way in the determination of which recommendations shall be made; any employe who, in connection with assigned duties, obtains 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 adviser prior to the effective dissemination of the recommendations:
(I) A person in a control relationship to the investment adviser.
(II) An affiliated person of a controlling person.
(III) An affiliated person of an affiliated person.
(vi) An investment adviser shall implement adequate procedures and use 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 the investment adviser in accordance with § 404.011 (relating to investment adviser brochure rule), 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 adviser by means of a solicitor to whom a cash fee was paid by the adviser shall maintain the following:
(i) Evidence of a written agreement to which the adviser is a party related to the payment of the fee.
(ii) 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.
(iii) A copy of the solicitor's written disclosure statement if required by § 404.013 (relating to cash payment for client solicitation).
(iv) For purposes of this paragraph, the term ''solicitor'' means any person or entity who, for compensation, directly or indirectly solicits any client for, or refers any client to, an investment adviser.
(16) The accounts, books, internal working papers and 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 adviser circulates or distributes, directly or indirectly, to two or more persons (other than persons connected with the investment adviser). 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 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 employe, 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 employes and investment adviser 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 adviser representatives as that term is defined in paragraph (12), which file should contain, but is not limited to, the applications, amendments, renewal filings and correspondence.
(b) [As a condition of the right to continue to transact business, each registered investment adviser shall immediately notify the Commission if the investment adviser shall fail to make and keep current the books and records required by this section. Within 24 hours after this notice, each investment adviser shall file with the commission a report stating what steps have been and are being taken to fully comply with this section.] If an investment adviser subject to subsection (a) has custody or possession of securities or funds of any client, the records required to be made and kept by subsection (a) shall also include:
(1) A journal or other record showing all purchases, sales, receipts and deliveries of securities (including certificate numbers) for all 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 registered or required to be registered under the act shall make, keep and preserve either a separate file of written complaints of customers and action taken by the investment adviser in response thereto, or a separate record of the complaints and a clear reference to the files containing the correspondence connected with the complaint as maintained by the investment adviser. A ''complaint'' shall be deemed to include a written statement of a customer or persons acting on behalf of a customer or a written notation of a verbal communication alleging a grievance involving the purchase or sale of securities, the solicitation or execution of a transaction, the disposition of securities or funds of the customer, or the rendering of investment advice.] Every investment adviser subject to subsection (a) that 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 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 adviser can promptly furnish the name of each the client, and the current amount or interest of the client.
(d) [The term ''customer'' of an investment adviser as used in this section includes persons to whom the investment adviser has given investment advice for which the investment adviser has received compensation.] The books or records required by this section may be maintained by the investment adviser in a 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) [The records required to be maintained under this chapter shall be retained and preserved for inspection by the Commission for a period of 5 years, the period to be measured from the date of the last entry therein or from the date of receipt of the communication or other information contained therein. The retention and preservation of records required in this section may be upon microfilm, computer disks or tapes or other similar recording process if adequate facilities are maintained for the examination of the facsimiles.] Every investment adviser subject to subsection (a) shall preserve the following records in the manner prescribed:
(1) The books and records required to be made under subsection (a), (b) and (c)(1) (except for books and records required to be made under subsection (a)(11) and (a)(16)), shall be maintained and preserved in an easily accessible place for at least 5 years from the end of the fiscal year during which the last entry was made on record, the first 2 years being in the principal office of the investment adviser.
(2) Partnership articles and any amendments, 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 3 years after termination of the enterprise.
(3) Books and records required to be made under subsection (a)(11) and (18) shall be maintained and preserved in an easily accessible place for at least 5 years, the first 2 years being 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) Books and records required to be made under subsection (a)(19) and (22) shall be maintained and preserved in an easily accessible place for at least 5 years, the first 2 years being 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.
(5) Notwithstanding other record preservation requirements of this section, 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:
(i) Records required to be preserved under subsections (a)(3), (7)--(10), (14), (15) and (17)--(19), (b) and (c).
(ii) Records or copies required under subsection (a)(11) and (16) which records or related records identify the name of the investment adviser representative providing investment advice from that business location, or which identify the business locations' physical address, mailing address, electronic mailing address or telephone number.
(f) An investment adviser subject to subsection (a), before ceasing to do business as an investment adviser, shall arrange 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 the period.
(g) The requirements for the storage of records are as follows:
(1) Records required to be maintained and preserved under this section may be immediately produced or reproduced by photograph on film or, as provided in paragraph (2), on magnetic disk, tape or other computer storage medium, and shall 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 meet the following conditions:
(i) Arrange the records and index the films or computer storage medium so as to permit the immediate location of any particular record.
(ii) 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 Commission by its examiners or other representatives may request.
(iii) Store separately from the original one other copy of the film or computer storage medium for the time required.
(iv) 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.
(v) With respect to records stored on photographic film, at all times have available for the Commission's examination of its records under section 304(a) of the act (70 P. S. § 1-304(a)) facilities for immediate, easily readable projection of the film and for producing easily readable facsimile enlargements.
(2) 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 adviser's business, are created by the adviser on electronic media or are received by the adviser solely on electronic media or by electronic data transmission.
(h) For purposes of this section, the following terms have the following meanings:
Client--A person to whom the investment adviser has given investment advice for which the investment adviser has received compensation.
Investment supervisory services--The giving of continuous advice as to the investment of funds on the basis of the individual needs of each client. Discretionary power does 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.
Principal place of business--The meaning set forth in 17 CFR 275.203A-3(c) (relating to definitions) promulgated under the Investment Advisers Act of 1940 (15 U.S.C.A. §§ 80b-1--80b-21).
(i) Any book or other record made, kept, maintained and preserved in compliance with Rules 17a-3 (17 CFR 240.17a-3) (relating to records to be made by certain exchange members, brokers and dealers) and 17a-4 (17 CFR 240.17a-4) (relating to records to be preserved by certain exchange members, brokers and dealers) under the Securities Exchange Act of 1934 (15 U.S.C.A. §§ 78a--78kk), 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.
(j) This section does not apply to an investment adviser registered under section 301 of the act that meets the following conditions:
(1) Has its principal place of business in a state other than this Commonwealth.
(2) Is licensed as an investment adviser in the state where it has its principal place of business.
(3) Is in compliance with the record keeping requirements of the state in which it has its principal place of business.
§ 304.022. Investment adviser required financial reports.
(a) [Every registered investment adviser shall file annually with the Commission a statement of its financial condition as of the end of its fiscal year.] Except as provided in subsection (b), the following investment advisers registered under section 301 of the act (70 P. S. § 1-301) shall file the following reports of financial condition with the Commission within 120 days of the investment adviser's fiscal year end:
(1) An investment adviser that has custody of client funds or securities or requires prepayment of advisory fees 6 months or more in advance and in excess of $500 per client shall file with the Commission an audited balance sheet as of the end of its fiscal year. The balance sheet shall be prepared in accordance with generally accepted accounting principles and contain an unqualified opinion of an independent certified public accountant or independent public accountant. The accountant shall submit, as a supplementary opinion, comments based on the audit as to material inadequacies found to exist in the accounting system, the internal accounting controls and procedures for safeguarding securities and funds, and shall indicate corrective action taken or proposed. If the investment adviser is a certified public accountant or a public accountant or whose principals include one or more certified public accountants or public accountants, the investment adviser, in lieu of filing an audit report, may file a report modeled after the management responsibility letter contained in paragraph 9600.22 of the American Institute of Certified Public Accountant's Technical Information Service signed by a certified public accountant or public accountant or one of the principals of the investment adviser.
(2) An investment adviser who has discretionary authority over client funds or securities, but not custody, shall file with the Commission a balance sheet as of the end of its fiscal year. The balance sheet need not be audited but shall be prepared in accordance with generally accepted accounting principles. The balance sheet shall contain a representation by the investment adviser that it is true and accurate.
(b) [Except as set forth in subsection (c), the annual statement of financial condition filed under this section shall be prepared in accordance with generally accepted accounting principles and may be unaudited.] The requirements of subsection (a) do not apply to an investment adviser registered under section 301 of the act whose principal place of business is in a state other than this Commonwealth if the investment adviser meets the following conditions:
(1) Is registered in the state in which it maintains its principal place of business.
(2) Is in compliance with the financial reporting requirements of the state in which it maintains its principal place of business.
(3) Has not taken custody of client assets at any time during the preceding 12 month period.
(c) [With respect to an investment adviser who has custody or possession of funds or securities in which a client has a beneficial interest, the annual statement of financial condition filed under this section shall be prepared in accordance with generally accepted accounting principles and accompanied by an auditor's report containing an unqualified opinion of an independent certified public accountant or independent public accountant. The accountant shall submit as a supplementary opinion, comments based upon the audit as to material inadequacies found to exist in the accounting system, the internal accounting controls and procedures for safeguarding securities and funds, and shall indicate corrective action taken or proposed.
(d) The annual statement of financial condition required by this section shall be filed within 120 days following the end of the investment adviser's fiscal year.] For purposes of this section, the following terms have the following meanings:
Principal--The chair, president, chief executive officer, general manager, chief operating officer, chief financial officer, vice president or other officer in charge of a principal business function (including sales, administration, finance, marketing, research and credit), secretary, treasurer, controller and any other natural person who performs similar functions.
Principal place of business--The meaning set forth in 17 CFR 275-203A-3(c) (relating to definitions) promulgated under the Investment Advisers Act of 1940 (15 U.S.C.A. §§ 80b-1--80b-21).
§ 304.052. Investment adviser compensation.
No investment adviser registered [or required to be registered] under the act may charge or receive commissions or other compensation in connection with the giving of investment advice unless the compensation is fair and reasonable and is determined on an equitable basis[,] and adequately disclosed to each [customer] client in writing [provided that the charges, commissions or other compensation consistent with rates set by a national securities exchange, when applied to transactions on that exchange, or by the Securities and Exchange Commission or national securities association registered under the Securities Exchange Act of 1934 (15 U.S.C. §§ 78a--78kk), may not be deemed unreasonable].
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