PREPROPOSAL STATEMENT OF INQUIRY
[Filed July 21, 1998, 3:16 p.m.]
Subject of Possible Rule Making: Adopt new section WAC 460-24A-110 relating to agency cross transactions of investment advisers to make regulation of investment advisers uniform among the states.
Statutes Authorizing the Agency to Adopt Rules on this Subject: Section 2, chapter 15, Laws of 1998, RCW 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.
(2) To make uniform rules relating to investment advisers regulated by the states.
(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
WAC 460-24A-110 Agency cross transactions. (a) For purposes of this rule, "agency cross transaction for an advisory client" means a transaction in which a person acts as an investment adviser in relation to a transaction in which the investment adviser, or any person controlling, controlled by, or under common control with such investment adviser, including an investment adviser representative, acts as a broker-dealer for both the advisory client and another person on the other side of the transaction. When acting in such capacity such person is required to be registered as a broker-dealer in this state unless excluded from the definition.
(b) An investment effecting an agency cross transaction for an advisory client shall be in compliance with 1998 Wash. Laws ch. 15, § 2 if the following conditions are met:
(1) The advisory client executes a written consent prospectively authorizing the investment adviser to effect agency cross transactions for such client;
(2) Before obtaining such written consent from the client, the investment adviser makes full written disclosure to the client that, with respect to agency cross transactions, the investment adviser will act as broker-dealer for, receive commissions from and have a potentially conflicting division of loyalties and responsibilities regarding both parties to the transactions;
(3) At or before the completion of each agency cross transaction, the investment adviser or any other person relying on this rule sends the client a written confirmation. The written confirmation shall include (A) a statement of the nature of the transaction, (B) the date the transaction took place (C) an offer to furnish, upon request, the time when the transaction took place and (D) the source and amount of any other remuneration the investment adviser received or will receive in connection with the transaction. In the case of a purchase, if the investment adviser was not participating in a distribution, or, in the case of a sale, if the investment adviser was not participating in a tender offer, the written confirmation may state whether the investment adviser has been receiving or will receive any other remuneration and that the investment adviser will furnish the source and amount of such remuneration to the client upon the client's written request;
(4) At least annually, and with or as part of any written statement or summary of the account from the investment adviser, the investment adviser or any other person relying on this rule sends each client a written disclosure statement identifying (A) the total number of agency cross transactions during the period for the client since the date of the last such statement or summary and (B) the total amount of all commissions or other remuneration the investment adviser received or will receive in connection with agency cross transactions for the client during the period;
(5) Each written disclosure and confirmation required by this rule must include a conspicuous statement that the client may revoke the written consent required under subsection (b)(1) of this rule at any time by providing written notice to the investment adviser;
(6) No agency cross transaction may be effected in which the same investment adviser recommended the transaction to both any seller and any purchaser.
(c) Nothing in this rule shall be construed to relieve an investment adviser or investment adviser representative from acting in the best interest of the client, including fulfilling his duty with respect to the best price and execution for the particular transaction for the client nor shall it relieve any investment adviser or investment adviser representative of any other disclosure obligations imposed by the Securities Act of Washington, chapter 21.20 RCW, and the rules and regulations thereunder.