PREPROPOSAL STATEMENT OF INQUIRY
[Filed July 21, 1998, 3:12 p.m.]
Subject of Possible Rule Making: Amend WAC 460-24A-220 relating to unethical business practices of investment advisers to make changes to that section consistent with state and federal law.
Statutes Authorizing the Agency to Adopt Rules on this Subject: RCW 21.20.110, 21.20.450.
Reasons Why Rules on this Subject may be Needed and What They Might Accomplish: (1) Title III of National Securities Markets Improvement Act of 1996 divided regulation of investment advisers between the United States Securities and Exchange Commission (SEC) and the states. The rule that the agency intends to adopt pertains to regulation of investment advisers who are not otherwise regulated by the SEC and other investment advisers to the extent permitted by NSMIA.
(2) To make uniform rules relating to investment advisers regulated by the states and federally covered investment advisers.
(3) This rule is intended to protect investors who conduct business with state regulated investment advisers.
Other Federal and State Agencies that Regulate this Subject and the Process Coordinating the Rule with These Agencies: United States Securities and Exchange Commission; fifty state securities administrators. The rule was coordinated and adopted by the North American Securities Administrators Association, Inc. and were recently amended to conform with the changes that NSMIA brought about in the securities industry.
Process for Developing New Rule: The rule was coordinated and adopted by the North American Securities Administrators Association, Inc. and adopted with a notice and comment procedure in the industry.
Interested parties can participate in the decision to adopt the new rule and formulation of the proposed rule before publication by contacting Marlo DeLange, Securities Division, Department of Financial Institutions, P.O. Box 9033, Olympia, WA 98507-9033, (360) 902-8760, fax (360) 586-5068, email@example.com, Securities Division Web Site http://www.wa.gov/dfi/securities.
July 15, 1998
Deborah R. Bortner
AMENDATORY SECTION [(Amending Order SDO-220-85, filed 11/19/85)]
WAC 460-24A-220 ((
Dishonest or u))Unethical business
practices--Investment advisers and (( investment adviser
salespersons)) federal covered advisers. (( The phrase "dishonest
or unethical practices" as used in RCW 21.20.110(7) as applied to
investment advisers and investment adviser salespersons is hereby
defined to include any of the following:)) A person who is an
investment adviser or a federal covered adviser is a fiduciary
and has a duty to act primarily for the benefit of its clients.
The provisions of this subsection apply to federal covered
advisers to the extent that the conduct alleged is fraudulent,
deceptive, or as otherwise permitted by the National Securities
Markets Improvement Act of 1996 (Pub. L. No. 104-290). While the
extent and nature of this duty varies according to the nature of
the relationship between an investment adviser and its clients
and the circumstances of each case, an investment adviser or a
federal covered adviser shall not engage in unethical business
practices, including the following:
(1) Recommending to a client to whom investment supervisory, management or consulting services are provided the purchase, sale or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the client on the basis of information furnished by the client after reasonable inquiry concerning the client's investment objectives, financial situation and needs, and any other information known by the investment adviser.
(2) Exercising any discretionary power in placing an order for the purchase or sale of securities for a client without obtaining written discretionary authority from the client within ten (10) business days after the date of the first transaction placed pursuant to oral discretionary authority, unless the discretionary power relates solely to the price at which, or the time when, an order involving a definite amount of a specified security shall be executed, or both.
(3) Inducing trading in a client's account that is excessive
in size or frequency in view of the financial resources,
investment objectives and character of the account((
.)) in light
of the fact that an adviser in such situations can directly
benefit from the number of securities transactions effected in a
client's account. The rule appropriately forbids an excessive
number of transaction orders to be induced by an adviser for a
(4) Placing an order to purchase or sell a security for the account of a client without authority to do so.
(5) Placing an order to purchase or sell a security for the account of a client upon instruction of a third party without first having obtained a written third-party trading authorization from the client.
(6) Borrowing money or securities from a client unless the client is a broker-dealer, an affiliate of the investment adviser, or a financial institution engaged in the business of loaning funds.
(7) Loaning money to a client unless the investment adviser is a financial institution engaged in the business of loaning funds or the client is an affiliate of the investment adviser.
(8) To misrepresent to any advisory client, or prospective advisory client, the qualifications of the investment adviser or any employees of the investment adviser, or to misrepresent the nature of the advisory services being offered or fees to be charged for such service, or to omit to state a material fact necessary to make the statements made regarding qualifications, services or fees, in light of the circumstances under which they are made, not misleading.
(9) Providing a report or recommendation to any advisory client prepared by someone other than the adviser without disclosing that fact. (This prohibition does not apply to a situation where the adviser uses published research reports or statistical analyses to render advice or where an adviser orders such a report in the normal course of providing service.)
(10) Charging a client an unreasonable advisory fee ((
relation to fees charged by other investment advisers or
investment adviser salespersons for similar services)).
(11) Failing to disclose to clients in writing before any
advice is rendered any material conflict of interest relating to
the adviser or any of its employees which could reasonably be
expected to impair the rendering of unbiased and objective advice
but not limited to)):
(a) Compensation arrangements connected with advisory services to clients which are in addition to compensation from such clients for such services; and
(b) Charging a client an advisory fee for rendering advice
when a commission for executing securities transactions pursuant
to such advice will be received by the adviser or its
; and (c) An ownership or interest in any entity in which the
investment adviser or investment adviser salesperson is
recommending that the client purchase (excluding mutual funds))).
(12) Guaranteeing a client that a specific result will be achieved (gain or no loss) with advice which will be rendered.
(13) Publishing, circulating or distributing any advertisement which does not comply with Rule 206 (4)-1 under the Investment Advisers Act of 1940.
(14) Disclosing the identity, affairs, or investments or any client unless required by law to do so, or unless consented to by the client.
(15) Taking any action, directly or indirectly, with respect to those securities or funds in which any client has any beneficial interest, where the investment adviser has custody or possession of such securities or funds when the adviser's action is subject to and does not comply with the requirements of Reg. 206 (4)-2 under the Investment Advisers Act of 1940.
(16) Entering into, extending or renewing any investment advisory contract unless such contract is in writing and discloses, in substance, the services to be provided, the term of the contract, the advisory fee, the formula for computing the fee, the amount of prepaid fee to be returned in the event of contract termination or nonperformance, whether the contract grants discretionary power to the adviser and that no assignment of such contract shall be made by the investment adviser without the consent of the other party to the contract.
(17) Failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information contrary to the provisions of Section 204A of the Investment Advisers Act of 1940.
(18) Entering into, extending, or renewing any advisory contract contrary to the provisions of section 205 of the Investment Advisers Act of 1940. This provision shall apply to all advisers registered or required to be registered under the Securities Act of Washington, chapter 21.20 RCW, notwithstanding whether such adviser would be exempt from federal registration pursuant to section 203(b) of the Investment Advisers Act of 1940.
(19) To indicate, in an advisory contract, any condition, stipulation, or provisions binding any person to waive compliance with any provision of the Securities Act of Washington, chapter 21.20 RCW, or of the Investment Advisers Act of 1940, or any other practice contrary to the provisions of section 215 of the Investment Advisers Act of 1940.
(20) Engaging in any act, practice, or course of business which is fraudulent, deceptive, or manipulative in contrary to the provisions of section 206(4) of the Investment Advisers Act of 1940, notwithstanding the fact that such investment adviser is not registered or required to be registered under section 203 of the Investment Advisers Act of 1940.
(21) Engaging in conduct or any act, indirectly or through or by any other person, which would be unlawful for such person to do directly under the provisions of the Securities Act of Washington, chapter 21.20 RCW, or any rule or regulation thereunder.
The conduct set forth above is not inclusive. ((
in other conduct such as (( forgery, embezzlement,))
nondisclosure, incomplete disclosure (( or misstatement of
material facts)), (( or manipulative)) or deceptive practices
shall (( also be grounds for denial suspension or revocation of
registration)) be deemed an unethical business practice. The
federal statutory and regulatory provisions referenced herein
shall apply to investment advisers and federal covered advisers,
to the extent permitted by the National Securities Markets
Improvement Act of 1996 (Pub. L. No. 104-290).
[Statutory Authority: RCW 21.20.450. 85-23-063 (Order SDO-220-85), § 460-24A-220, filed 11/19/85.]
Reviser's note: The bracketed material preceding the section above was supplied by the code reviser's office.
Reviser's note: RCW 34.05.395 requires the use of underlining and deletion marks to indicate amendments to existing rules. The rule published above varies from its predecessor in certain respects not indicated by the use of these markings.