[30 Pa.B. 4551]
[Continued from previous Web Page] The exact amount of the user fees has not yet been determined by the SEC, in part because it does not know the level of participation by the SRAs. That is why the SEC Chairperson Arthur Levitt, in his May 30, 2000, letter, urged the widest possible participation by the states because that would result in the lowest possible user fees for SRAs. In the same letter, it was noted that larger, FCAs will pay higher user fees than the SRAs.
The NASAA recently advised the Commission (in an unofficial capacity) that it thought the likely annual user fee would be approximately $125 for SRAs and approximately $50 for IARs. As of July 1, 2000, the Commission has 470 registered investment advisers and 2,333 registered IARs. The vast majority of registered IARs (69%) work for FCAs which will be mandated by the SEC to use IARD.
In return for the IARD user fee, investment advisers can make as many filings by means of the IARD electronic system as they want (registration applications, amendments, filing and updating of disclosure materials). This eliminates duplicate filings with other states, associated mailing costs and issuing separate checks for fee payments. Being Web-based, the investment advisory community will have access to IARD on a 24-hour a day basis. The NASAA further advised that the IARD does provide hardship exemptions for persons who may not have access to Internet or, due to computer problems beyond their control, may not be able to file timely through the IARD. The Commission intends to honor hardship exemptions granted by the IARD.
The Commission understands that the United States Senate Banking Committee is considering amendments to the 1940 Act which would preempt state jurisdiction over notice filings and fee payments by FCAs and registration applications and fee payments by out-of-state investment advisers subject to state registration if the Commission did not accept filings made through the IARD.
Given Congressional support for mandating the IARD in the NSMIA and current Congressional ruminations on mandating state participation in the IARD on pain of preemption; the request of the SEC for state participation in the IARD; support for the IARD by the trade organizations representing the entire spectrum of the investment advisory community; the elimination or substantial reduction of net worth requirement for all investment advisers registered with the Commission; the benefit to investors of having a complete, Web-based data base to consult when looking for investment advisory services; and the time savings to the investment advisory community of making all regulatory filings in one place online, the Commission believes the benefits of participating in the IARD justify the costs of participation to the investment advisory community.
Issuers. Most companies making a registered public offering of securities no longer will have to expend the time and money to file an additional state-specific form with the Commission.
Recordkeeping, supervision, disclosure delivery. The recordkeeping provisions, supervisory requirements and disclosure delivery requirements are similar to what currently is required by the NASD Code of Conduct, existing Commission regulations or Federal law with respect to FCAs. Therefore, the regulatory actions will not impose additional financial burdens on applicants or registrants.
Paperwork
The Commission has eliminated current Forms 205 and 206 in favor of one new form designated as Commission Form R which will be used by certain issuers making application with the Commission to make a public offering of securities in this Commonwealth. The Commission further reduced substantially the categories of issuers that would be required to file new Form R. With respect to investment advisers, the Commission, in certain cases, has eliminated required financial reports and statements of financial condition that must be filed by applicants or registrants and, in other cases, reduced substantially the required financial reports and statements of financial condition.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on April 11, 2000, the Commission submitted a copy of proposed rulemaking at 30 Pa.B. 2237 to IRRC and the Chairpersons of the House Committee on Commerce and Economic Development and the Senate Committee on Banking and Insurance for comment and review. In accordance with section 5(b) of the Regulatory Review Act, the Commission provided IRRC and the Committees with a copy of a detailed Regulatory Analysis form prepared in compliance with Executive Order 1996-1, ''Regulatory Review and Promulgation.'' A copy of this material is available upon request.
By letter dated July 6, 2000, IRRC provided the Commission with its comments on the proposed rulemaking. The Commission's response to those comments is contained in this Preamble. In response to a letter from IRRC dated July 24, 2000, recommending tolling of the review period to address certain technical and clarification issues, the Commission, by letter to IRRC dated July 26, 2000, requested tolling and resubmitted revised final-form rules. By letter dated July 27, 2000, IRRC advised the Commission that it did not object to tolling the review period.
In preparing final-form rules, the Commission considered the comments received from the public, the United States Securities and Exchange Commission and IRRC. The final-form rules were submitted on July 12, 2000, to the House Committee on Commerce and Economic Development, the Senate Committee on Banking and Insurance and IRRC. Final-form rules were deemed approved by the House Committee on Commerce and Economic Development and the Senate Committee on Banking and Insurance on August 7, 2000. IRRC met on August 10, 2000, and approved the final-form rules.
Availability in Alternative Formats
This final-form rulemaking may be made available in alternative formats upon request. TDD users should use the AT&T Relay Center (800) 854-5984. To make arrangements for alternative formats, contact Joseph Shepherd, ADA Coordinator, (717) 787-6828.
Contact Person
The contact person for an explanation of these regulations and amendments is G. Philip Rutledge, Deputy Chief Counsel, Pennsylvania Securities Commission, Eastgate Building, 1010 N. Seventh Street, 2nd Floor, Harrisburg, PA 17102-1410, (717) 783-5130.
Order
The Commission, acting under the authorizing statute, orders that:
(a) The regulations of the Commission, 64 Pa. Code Chapters 202, 203, 205, 206, 301, 302, 303, 304, 305, 404, 602 and 603 are amended by amending §§ 202.070, 203.101, 203.171, 203.185, 203.186, 205.021, 206.010, 302.063, 303.051, 404.020 and 602.060 to read as set forth at 30 Pa.B. 2237; by adding § 203.192 to read as set forth at 30 Pa.B. 2237 and by deleting § 301.021 to read as set forth at 30 Pa.B. 2237; by amending §§ 303.012, 303.014, 303.021, 303.032, 303.042, 304.012, 304.022, 304.052, 305.011, 305.019, 305.061, 404.010 and 603.031 to read as set forth in Annex A; and by adding §§ 303.015 and 404.011--404.013 to read as set forth in Annex A, with ellipses referring to the existing text of the regulations.
(b) The Secretary of the Commission shall submit this order, 30 Pa.B. 2237 and Annex A to the Office of Attorney General for approval as to form and legality as required by law.
(c) The Secretary of the Commission shall certify this order, 30 Pa.B. 2237 and Annex A and deposit them with the Legislative Reference Bureau as required by law.
(d) This order shall take effect upon publication in the Pennsylvania Bulletin.
M. JOANNA CUMMINGS,
Secretary(Editor's Note: The proposal to add § 404.014 included in the document at 30 Pa.B. 2237, has been withdrawn by the Commission. For the text of the order of the Independent Regulatory Review Commission, relating to this document, see 30 Pa.B. 4480 (August 26, 2000).)
Fiscal Note: Fiscal Note 50-114 remains valid for the final adoption of the subject regulations.
Annex A
TITLE 64. SECURITIES
PART I. SECURITIES COMMISSION
Subpart C. REGISTRATION OF BROKER-DEALERS, AGENTS, INVESTMENT ADVISERS AND INVESTMENT ADVISER REPRESENTATIVES AND NOTICE FILINGS BY FEDERALLY-COVERED ADVISERS
CHAPTER 303. REGISTRATION AND NOTICE FILING PROCEDURE § 303.012. Investment adviser registration procedure.
(a) An application for initial registration as an investment adviser shall contain the information requested in and shall be made on the Uniform Application for Investment Adviser Registration (Form ADV), or a successor form. The applicant shall complete and file with the Commission or with an investment adviser registration depository designated by order of the Commission one copy of the form accompanied by the filing fee in section 602(d.1) of the act (70 P. S. § 1-602(d.1)), the compliance assessment in section 602.1(a)(4) of the act and any exhibits required by this section.
(b) Except as set forth in subsection (f), the following statements of financial condition shall accompany an application for initial registration as an investment adviser.
(1) An applicant that has custody of client funds or securities or an applicant that requires payment of advisory fees 6 months or more in advance and in excess of $1,200 per client shall file an audited balance sheet of the applicant prepared in accordance with generally accepted accounting principles and accompanied by a standard audit report containing an unqualified opinion of an independent certified public accountant or an 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 the procedures for safeguarding securities and funds and shall indicate corrective action taken or proposed. The balance sheet required by this paragraph shall be as of the end of the applicant's most recent fiscal year. If that balance sheet is as of a date more than 45 days prior to the date of filing the application, the applicant also shall file a subsequent balance sheet prepared in accordance with generally accepted accounting principles as of a date within 45 days of the date of filing. This balance sheet may be unaudited and may be prepared by management of the applicant. If the applicant is a certified public accountant or a public accountant or whose principals include one or more certified public accountants or public accountants, the applicant, 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 and signed by a certified public accountant or public accountant who either is the applicant or one of the principals of the applicant.
(2) An applicant that has discretionary authority over client funds or securities, but not custody, shall file a balance sheet which need not be audited but shall be prepared in accordance with generally accepted accounting principles. The balance sheet required by this paragraph shall be as of the end of the applicant's most recent fiscal year. If that balance sheet is as of a date more than 45 days prior to the date of filing the application, the applicant also shall file a subsequent balance sheet, which must be prepared in accordance with generally accepted accounting principles as of a date within 45 days of filing the application. Each balance sheet required by this paragraph may be unaudited and prepared by management of the applicant. Each balance sheet required by this paragraph also shall contain a representation by the applicant that the balance sheet is true and accurate.
(3) An applicant whose proposed activities do not come within paragraph (1) or (2) need not file a statement of financial condition.
(c) As part of the requirements relating to the statements of financial condition set forth in subsection (b), the Commission may require the following:
(1) A list of the securities reflected in the statement of financial condition of the applicant valued at the market.
(2) A description of material contractual commitments of the applicant not otherwise reflected in the statement of financial condition.
(3) In the case of a sole proprietor, whose statement of financial condition includes only those assets and liabilities used in the applicant's investment adviser business, an affirmative statement by the applicant that its liabilities which have not been incurred in the course of business as an investment adviser are not greater than the applicant's assets not used in its investment adviser business.
(d) An investment adviser registered under the act shall take steps necessary to ensure that material information contained in its Form ADV and exhibits remains current and accurate. If a material statement made in Form ADV and exhibits becomes incorrect or inaccurate the investment adviser shall file with the Commission an amendment on Form ADV within 30 days of the occurrence of the event which requires the filing of the amendment.
(e) For purposes of this section, the following terms shall have the following meanings:
Principal--The chairperson, 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).
(f) An applicant that maintains its principal place of business in a state other than this Commonwealth need not comply with subsection (a) if the applicant meets the following:
(1) Is registered as an investment adviser 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 the assets of any client residing in this Commonwealth at any time during the preceding 12-month period.
§ 303.014. Investment adviser representative registration procedures.
(a) An application for initial registration as an investment adviser representative of an investment adviser or Federally-covered adviser shall contain the information requested in and shall be made on the Uniform Application for Securities Industry Registration or Transfer Form (Form U-4), or a successor form. The investment adviser representative and the investment adviser or Federally covered adviser shall complete and file with the Commission or with an investment adviser registration depository designated by order of the Commission one copy of Form U-4 and exhibits thereto accompanied by the filing fee required by section 602(d.1) of the act (70 P. S. § 1-602(d.1)), the compliance assessment required by section 602.1(a)(1) of the act (70 P. S. § 1-602.1(a)(1)) and the results evidencing passage of the examinations required by § 303.032 (relating to qualification of and examination requirement for investment advisers and investment adviser representatives).
(b) An investment adviser representative and an investment adviser or Federally-covered adviser shall take necessary steps to ensure that material information contained in Form U-4 remains current and accurate. If a material statement made in the Form U-4 becomes incorrect or incomplete, the investment adviser representative and the investment adviser or Federally-covered adviser shall file with the Commission an amendment to Form U-4 within 30 days of the occurrence of the event which requires the filing of the amendment.
§ 303.015. Notice filing for Federally-covered advisers.
(a) Initial filing. The notice required to be filed by Federally-covered advisers under section 303(a)(iii) of the act (70 P. S. § 1-303(a)(iii)) shall be the uniform application for investment adviser registration (Form ADV) or successor form thereto as filed with the United States Securities and Exchange Commission. Prior to the Federally-covered adviser conducting advisory business in this Commonwealth, a completed Form ADV accompanied by the notice filing fee required by section 602(d.1) of the act (70 P. S. § 1-602(d.1)) shall be filed with the Commission or with an investment adviser registration depository designated by order of the Commission.
(b) Renewals. Every Federally-covered adviser conducting advisory business in this Commonwealth annually shall pay a notice filing fee set forth in section 602(d.1) of the act. Payment of the notice filing fee should be made directly with the Commission or with an investment adviser registration depository designated by order of the Commission.
§ 303.021. Registration and notice filing procedures for successors to a broker-dealer, investment adviser or Federally-covered adviser.
(a) The following apply with respect to broker-dealers:
(1) When a broker-dealer is formed or proposed to be formed for the purpose of succeeding to, and continuing the business of, a broker-dealer registered under section 301 of the act (70 P. S. § 1-301) and as a broker or dealer under section 15(b) of the Securities Exchange Act of 1934 (15 U.S.C.A. § 77o(b)) (successor broker-dealer) based solely on a change in the predecessor's date or state of incorporation, form of organization or composition of a partnership, the successor broker-dealer shall comply with the requirements of SEC Rule 15b1-3(a) promulgated under the Securities Exchange Act of 1934, except that the successor broker-dealer shall file the amendments to Form BD with the Commission.
(2) When a broker-dealer is formed or proposed to be formed for the purpose of succeeding to, and continuing the business of, a broker-dealer registered under section 301 of the act and as a broker or dealer under section 15(b) of the Securities Exchange Act of 1934 (successor broker-dealer) for reasons other than a change in the predecessor's date or state of incorporation, form of organization or composition of a partnership, the successor broker-dealer shall comply with the requirements of SEC Rule 15b1-3(b) promulgated under the Securities Exchange Act of 1934, except that the successor shall file Form BD with the Commission.
(b) The following shall apply to investment advisers:
(1) When an investment adviser is formed or proposed to be formed for the purpose of succeeding to, and continuing the business of, an investment adviser registered under section 301 of the act (successor investment adviser) based solely on a change in the predecessor's date or state of incorporation, form of organization or composition of a partnership, the successor investment adviser may file an initial application for registration by amending Form ADV of the predecessor and, under section 303(b) of the act (70 P. S. § 1-303(b)), succeed to the unexpired portion of the predecessor's term of registration.
(2) When an investment adviser is formed or proposed to be formed for the purpose of succeeding to, and continuing the business of, an investment adviser registered under section 301 of the act for reasons other than a change in the predecessor's date or state of incorporation, form of organization or composition of a partnership, the successor investment adviser shall file Form ADV with the Commission. Upon registration, the successor investment adviser, under section 303(b) of the act, shall succeed to the unexpired portion of the predecessor's term of registration.
(c) When a Federally covered adviser is formed or proposed to be formed for the purpose of succeeding to, and continuing the business of, a registered investment adviser or of another Federally-covered adviser (successor Federally-covered adviser), the successor Federally-covered adviser shall file with the Commission either Form ADV or an amendment to Form ADV as required under SEC Release No. IA-1357 (December 28, 1992) and, under section 303(b) of the act, shall succeed to the unexpired portion of the predecessor's notice period.
§ 303.032. Examination requirements for investment advisers and investment adviser representatives.
(a) Examination requirements. An individual may not be registered as an investment adviser or investment adviser representative under the act unless the person has met one of the following qualifications:
(1) Received, on or after January 1, 2000, and within 2 years immediately prior to the date of filing an application with the Commission, a passing grade on The Uniform Investment Adviser Law Examination (Series 65), or successor examination.
(2) Received, on or after January 1, 2000, and within 2 years immediately prior to the date of filing an application with the Commission, a passing grade on the General Securities Representative Examination (Series 7) administered by the National Association of Securities Dealers, Inc. and the Uniform Combined State Law Examination (Series 66) or successor examinations.
(3) Received, on or after January 1, 2000, a passing grade on either the Series 65 examination or passing grades on both the Series 7 and Series 66 examinations and has not had a lapse in registration as an investment adviser or investment adviser representative in any state other than this Commonwealth for a period exceeding 2 years immediately prior to the date of filing an application with the Commission.
(b) Grandfathering.
(1) Compliance with subsection (a) is waived if the individual meets the following qualifications:
(i) Prior to January 1, 2000, the individual had received a passing grade on the Series 2, 7, 8 or 24 examination for registered representatives or supervisors administered by the National Association of Securities Dealers, Inc. and the Series 65 or Series 66 examinations.
(ii) The individual has not had a lapse in employment as an investment adviser, investment adviser representative or principal or agent of a broker-dealer for any consecutive period exceeding 2 years immediately preceding the date of filing an application with the Commission.
(2) An individual need not comply with subsection (a) if the individual meets the following qualifications:
(i) Prior to January 1, 2000, the individual was registered as an investment adviser or investment adviser representative in any state requiring the licensing, registration or qualification of investment advisers or investment adviser representatives.
(ii) The individual has not had a lapse in registration as an investment adviser or investment adviser representative in another state for any consecutive period exceeding 2 years immediately preceding the date of filing an application with the Commission.
(c) Waivers of exam requirements. Compliance with subsection (a) is waived if:
(1) The individual meets the following qualifications:
(i) Has no disciplinary history which requires an affirmative response to Items 23A-E or Item 23H of The Uniform Application for Securities Industry Registration or Transfer (Form U-4) or successor items thereto.
(ii) Has been awarded any of the following designations which, at the time of filing of the application with the Commission, is current and in good standing:
(A) Certified Financial Planner (CFP) awarded by the Certified Financial Planner Board of Standards, Inc.
(B) Chartered Financial Consultant (CFC) or Master of Science and Financial Services (MSFS) awarded by the American College, Bryn Mawr, Pennsylvania.
(C) Chartered Financial Analyst (CFA) awarded by the Institute of Chartered Financial Analysts.
(D) Personal Financial Specialist (PFS) awarded by the American Institute of Certified Public Accountants.
(E) Chartered Investment Counselor (CIC) awarded by the Investment Counsel Association of America, Inc.
(2) The individual is licensed as a certified public accountant, is currently in good standing and has no disciplinary history that requires an affirmative response to Items 23A-E or Item 23H of Form U-4 or successor items thereto.
(3) The individual is licensed as an attorney, is currently in good standing and has no disciplinary history that requires an affirmative response to Items 23A-E or Item 23H of Form U-4 or successor items thereto.
(4) The individual has received an order from the Commission waiving compliance with subsection (a).
§ 303.042. Investment adviser capital requirements.
(a) Every investment adviser registered or required to be registered under section 301 of the act (70 P. S. § 1-301) shall maintain at all times the following net worth requirements:
(1) An investment adviser 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) Except as provided in subsection (e), an investment adviser 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 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:
(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 $1,200 per client shall maintain at all times a positive net worth.
(b) As condition of the right to continue to transact business in this Commonwealth, an investment adviser registered under the act shall notify, by the close of business on the next business day, the Commission if the investment adviser's total net worth is less than the minimum required net worth. Within 24 hours after transmitting the notice, the investment adviser shall file a report of its financial condition including the following:
(1) A proof of money balances of ledger accounts in the form of a trial balance.
(2) A computation of net worth.
(3) An analysis of clients' securities and funds which are not segregated.
(4) A computation of the aggregate amount of clients' ledger debit balances.
(5) A computation of the aggregate amount of clients' ledger credit balances.
(6) A statement as to the number of client accounts.
(c) For the purpose of this section, the following terms have the following meanings:
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 any 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, the Commission may require that a current appraisal be submitted to establish the worth of an asset being calculated under the net worth formulation.
(e) The requirements of subsection (a)(2) do 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. § 77o) 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.
CHAPTER 304. POSTREGISTRATION PROVISIONS § 304.012. Investment adviser required records.
(a) Except as provided in subsection (j), every investment adviser 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. 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 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 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, ''financial statements'' shall mean 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) Is not 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), the investment adviser is not required to keep a record of the names and addresses of the persons to whom it was sent except, that if the notice, circular or advertisement is distributed to persons named on any list, the investment 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:
(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 not later than 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:
(A) 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.
(B) 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.
(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 any investment adviser representative of the investment adviser has, or by reason of any transaction acquires, any direct or indirect beneficial ownership, except transactions:
(A) 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) 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 not later than 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 other business or businesses.
(v) For purposes of this paragraph, the following terms have the following meanings:
(A) 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 as follows:
(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.
(B) 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 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.
(vi) An investment adviser shall implement adequate procedures and use reasonable diligence to promptly obtain 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 under § 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 § 404.012 (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) All accounts, books, internal working papers, and any other records or documents that are necessary to form the basis for, or demonstrate the calculation of, the performance or rate of return of all managed accounts or securities recommendations in any notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication, including but not limited to, electronic media that the investment adviser circulates or distributes, directly or indirectly, to two or more persons (other than persons connected with the investment adviser) except 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 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, all applications, amendments, renewal filings and correspondence.
(b) 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) also shall 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 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 client, and the current amount or interest of the client.
(d) Books or records required by this section may be maintained by the investment adviser so 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) shall preserve the following records in the manner prescribed:
(1) The books and records required to be made under subsections (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), (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 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:
(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:
(i) Client--Any person to whom the investment adviser has given investment advice for which the investment adviser has received compensation.
(ii) 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.
(iii) 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) The requirements of this section do 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 recordkeeping requirements of the state in which it has its principal place of business.
§ 304.022. Investment adviser required financial reports.
(a) 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 $1,200 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) 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 assets of any client residing in this Commonwealth at any time during the preceding 12 month period.
(c) 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 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.
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