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PA Bulletin, Doc. No. 05-708

RULES AND REGULATIONS

Title 64--SECURITIES

SECURITIES COMMISSION

[64 PA. CODE CHS. 203, 303, 304 AND 404]

Investment Advisors; Exchange Transactions

[35 Pa.B. 2307]

   The Securities Commission (Commission), under sections 203(r), 303(a) and (d), 304(b) and 404 of thePennsylvania Securities Act of 1972 (70 P. S. §§ 1-203(r), 1-303(a) and (d), 1-304(b) and 1-404) (act), amends and adopts regulations concerning the subject matter of the act to read as set forth in Annex A.

Publication of Notice of Proposed Rulemaking

   The proposed rulemaking was published at 34 Pa.B. 5168 (September 18, 2004).

Public Comments

   No public comments were received.

Comments of the Independent Regulatory Review Commission (IRRC)

   By letter dated November 17, 2004, IRRC advised that it had no objections, comments or suggestions with respect to the proposed rulemaking.

Changes Made by the Commission on Adoption

   The Commission has made no changes to the proposed rulemaking.

Summary and Purpose of Rulemaking

§ 203.203 (relating to certain Rule 144A exchange transactions exempt)

   The Commission adopts § 203.203 to provide a self-executing exemption for certain exchange transactions of debt securities in which certain accredited investors receive registered debt securities of the issuer in exchange for the issuer's debt securities that originally were issued in a private transaction under SEC Rule 144A (Rule 144A Exchange Transactions).

§ 303.012 (relating to investment adviser registration procedure)

   Since the American Institute of Certified Public Accountants no longer permits its members to issue management responsibility letters, the Commission amends this section to delete use of a management responsibility letter in lieu of an audit report where the investment adviser applicant is a certified public accountant (CPA) or a firm consisting of CPAs. The Commission also deletes the definition of ''principal'' which was used to define who could sign a management responsibility letter. Also, the Commission deletes the ability of public accountants to render an audit report which is required by changes made to section 609(c) of the act by the act of November 24, 1998 (P. L. 829, No. 109) (Act 109).

§ 303.032 (relating to examination requirements for investment advisers and investment adviser representatives)

   The Commission amends this section to require CPAs and attorneys to notify the Commission of their eligibility for a waiver of the examination requirement for investment advisers and investment adviser representatives. Applications for registration as an investment adviser or investment adviser representative are processed electronically through the web based Investment Adviser Registration Depository (IARD). The IARD only recognizes exam waivers for certain uniform designations which do not include attorneys or CPAs. Therefore, the only way the Commission knows that those applicants are eligible for a waiver of the exam requirement is to impose a notification requirement on the applicant.

§ 303.042 (relating to investment adviser capital requirements)

   The Commission amends this section to make it clear that an investment adviser will not be deemed to have custody of client's funds or securities and thereby be subject to a higher net worth requirement solely due to the investment adviser receiving a fee directly from the assets of the client, serving as a general partner of a pooled investment vehicle or serving as a trustee of a family beneficial trust if the investment adviser meets certain conditions.

§ 304.022 (relating to investment adviser required financial reports)

   Since the American Institute of Certified Public Accountants no longer permits its members to issue management responsibility letters, the Commission amends this section to delete use of a management responsibility letter in lieu of an audit report when the investment adviser applicant is a CPA or a firm consisting of CPAs. Also, the Commission deletes the ability of public accountants to render an audit report which is required by changes made to section 609(c) of the act by Act 109. The Commission deletes the definition of principal which was used to define who could sign a management responsibility letter. Lastly, the Commission exempts investment advisers with custody of clients' funds or securities from filing an annual audited balance sheet if they only inadvertently held clients' funds or securities and returned them to the client within 3 business days.

§ 404.013 (relating to investment adviser custody or possession of funds or securities of clients)

   The Commission amends this section to permit an investment adviser to send itemized client statements to another person authorized by the client or to reasonably rely on a qualified custodian of the client's funds or securities to send an itemized statement to the client.

Persons Affected by the Final-Form Rulemaking

   Investment advisers who are required to be registered with the Commission and have custody of clients' funds or securities, which the Commission estimates to be less than ten registrants, will be affected by this final-form rulemaking. Also affected will be issuers that engage in a Rule 144A Exchange Transaction with a holder of debt securities located in this Commonwealth.

Fiscal Impact

   The new exemption for Rule 144A Exchange Transactions will eliminate a current requirement that the transactions be registered under section 205 or section 206 of the act (70 P. S. §§ 1-102 and 1-206). The Commission anticipates an annual revenue loss to the General Fund of approximately $7,500. The amendments applicable to the few investment adviser registrants who have custody of clients' funds or securities will not impose significant additional recordkeeping costs beyond those which currently exist.

Paperwork

   The next exemption for Rule 144A Exchange Transactions will eliminate the filing of Commission Form R. The Commission eliminates Form 203-I. The amendments applicable to the few investment adviser registrants who have custody of clients' funds or securities will require some new recordkeeping.

Effective Date

   The rulemaking will become effective upon final-form publication in the Pennsylvania Bulletin.

Regulatory Review

   Under Section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on September 1, 2004, the Commission submitted a copy of the proposed rulemaking published at 34 Pa.B. 5168 to IRRC and the Chairpersons of the House Commerce Committee and the Senate Committee on Banking and Insurance for comment and review. In addition to submitting the amendments, the Commission has provided IRRC and the Committees with a copy of a detailed Regulatory Analysis form prepared by the Commission. A copy of this material is available upon request.

   By letter dated November 17, 2004, IRRC stated that it did not have any objections, comments or suggestions to offer on the proposed rulemaking. The Commission has made no changes to the proposed rulemaking when preparing the final-form regulations. The final-form rulemaking was submitted on February 1, 2005, to IRRC and the Chairpersons of the Committees. The final-form rulemaking was deemed approved by the Committees on February 23, 2005. The final-form rulemaking was deemed approved by IRRC under section 5(g) of the Regulatory Review Act, effective February 23, 2005.

Availability in Alternative Formats

   This final-form rulemaking may be made available in alternative formats upon request. The Commission also will receive comments on the final-form rulemaking in alternative formats. TDD users should use the AT&T Relay Center (800) 854-5984. To make arrangements for alternative formats, contact Sam Dengel, ADA Coordinator (717) 787-6828.

Contact Person

   The contact person is Mary E. Peters, Deputy Chief Counsel, Securities Commission, Eastgate Building, 1010 N. Seventh Street, 2nd Floor, Harrisburg, PA 17102-1410, (717) 783-4186.

Order

   The Commission, acting under the authorizing statute, orders that:

   (a)  The regulations of the Commission, 64 Pa. Code Chapters 203, 303, 304 and 404, are amended by amending §§ 303.012, 303.032, 303.042, 304.022 and 404.013 and by adding § 203.203 to read as set forth at 34 Pa.B. 5168.

   (b)  The Secretary of the Commission shall submit this order and 34 Pa.B. 5168 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 and 34 Pa.B. 5168 and deposit them with the Legislative Reference Bureau as required by law.

   (d)  This order shall take effect upon publication in the Pennsylvania Bulletin.

JEANNE S. PARSONS,   
Secretary

   (Editor's Note: For the text of the order of the Independent Regulatory Review Commission relating to this document, see 35 Pa.B. 1734 (March 12, 2005).)

   Fiscal Note: Fiscal Note 50-119 remains valid for the final adoption of the subject regulations.

[Pa.B. Doc. No. 05-708. Filed for public inspection April 15, 2005, 9:00 a.m.]


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