WSR 99-21-072

PROPOSED RULES

DEPARTMENT OF

FINANCIAL INSTITUTIONS
(Securities Division)

[ Filed October 20, 1999, 8:17 a.m. ]

Original Notice.

Preproposal statement of inquiry was filed as WSR 99-13-196.

Title of Rule: Amendments to chapter 460-24A WAC, the rules regulating investment advisers.

Purpose: Amendments are needed to chapter 460-24A WAC to reflect statutory renumbering that occurred in the 1998 amendments to the Securities Act of Washington, chapter 21.20 RCW; WAC 460-24A-050 is being amended to allow for the changes to the Series 65 examination that will occur on January 1, 2000; and WAC 460-24A-150 is being amended to reflect the adoption by the SEC of Release IA-1731.

Statutory Authority for Adoption: RCW 21.20.450.

Statute Being Implemented: Chapter 21.20 RCW.

Summary: WAC 460-24A-040 and 460-24A-110 will be amended to correct statutory references; WAC 460-24A-050 will be amended to eliminate the Series 7 and Series 24 examination requirements for applicants passing the Series 65 examination after December 31, 1999; chapter 460-150 WAC will be amended to update performance compensation arrangements in accordance with federal law.

Reasons Supporting Proposal: The amendments are necessary to promote uniformity with federal law and model rules proposed for the states through NASAA.

Name of Agency Personnel Responsible for Drafting: Nelda Shannon, 210 11th Avenue S.W., Olympia, WA, (360) 902-8768; Implementation: John L. Bley, 210 11th Avenue S.W., Olympia, WA, (360) 902-8700; and Enforcement: Deborah Bortner, 210 11th Avenue S.W., Olympia, WA, (360) 902-8760.

Name of Proponent: Department of Financial Institutions, Securities Division, governmental.

Rule is not necessitated by federal law, federal or state court decision.

Explanation of Rule, its Purpose, and Anticipated Effects: WAC 460-24A-040 amendments are to recodify a reference to RCW 21.20.040 (2) to (3), due to 1998 statutory change. WAC 460-24A-050 provides for investment adviser and investment adviser representative examination and registration requirements. The rule requires amending because on January 1, 2000, a new Series 65 examination will go into effect which will require the applicant to demonstrate competency in relevant areas. Washington is basically adopting the NASAA (North American Securities Administrators Association) sample rule, except that applicants registered in another jurisdiction who apply for Washington registration would need to take the required examinations unless the other jurisdiction had an examination requirement as a condition of registration in that jurisdiction. Other differences from the sample rule include clarification of who may satisfy the examination requirements if the applicant is an entity (this is consistent with the present rule), and the proposed rule also addresses the problem of persons taking the Series 65 examination prior to January 1, 2000, without registering prior to that date. The registration requirements are also set forth in greater detail.

The WAC 460-24A-110 amendment is to recodify a reference to the 1998 session law to the RCW number assigned to it, RCW 21.20.020(3).

The WAC 460-24A-150 amendment is to update the rule to the current federal rule 205-3, which applies to state-registered advisers in any case.

Proposal Changes the Following Existing Rules: See above.

No small business economic impact statement has been prepared under chapter 19.85 RCW. The proposals do not have an economic impact on business.

Section 201, chapter 403, Laws of 1995, does not apply to this rule adoption. The Department of Financial Institutions is not a listed agency in section 201.

Hearing Location: Department of Financial Institutions, Executive Conference Room, 300 General Administration Building, 210 11th Avenue S.W., Olympia, WA 98504, on November 24, 1999, at 10:00 a.m.

Assistance for Persons with Disabilities: Contact Darlene Christiansen by November 19, 1999, TDD (360) 664-8126 or (360) 902-8760.

Submit Written Comments to: Nelda Shannon, P.O. Box 9033, Olympia, WA 98507-9033, fax (360) 704-6968, by November 23, 1999.

Date of Intended Adoption: November 29, 1999.

October 19, 1999

John L. Bley

Director



AMENDATORY SECTION [(Amending WSR 97-16-050, filed 7/31/97)]WAC 460-24A-040
Use of certain terms.

(1) For the purposes of RCW 21.20.040(((2)))(3), use of any term, or abbreviation for a term, including the word "financial planner" or the word "investment counselor" is considered the same as the use of either of those terms alone.  

(2) For the purposes of RCW 21.20.040(((2)))(3), terms that are deemed similar to "financial planner" and "investment counselor" include, but are not limited to, the following:

(a) Financial consultant;

(b) Investment consultant;

(c) Money manager;

(d) Investment manager;

(e) Investment planner;

(f) Chartered financial consultant or its abbreviation ChFC; or

(g) The abbreviation CFP.

[Statutory Authority: RCW 21.20.450.  97-16-050, 460-24A-040, filed 7/31/97, effective 8/31/97.  Statutory Authority: RCW 21.20.040(2) and 21.20.450.  93-01-113, 460-24A-040, filed 12/21/92, effective 1/21/93; 90-13-029, 460-24A-040, filed 6/12/90, effective 7/13/90.]

Reviser's note: The bracketed material preceding the section above was supplied by the code reviser's office.

Reviser's note: The typographical errors in the above section occurred in the copy filed by the agency and appear in the Register pursuant to the requirements of RCW 34.08.040.

AMENDATORY SECTION [(Amending WSR 97-16-050, filed 7/31/97)]WAC 460-24A-050
Investment adviser and investment adviser ((salesperson)) ((())representative(())) registration and examinations.

(((1) In order for an applicant to become licensed in this state as an investment adviser the individual applicant, an officer of the applicant if the applicant is a corporation, or a general partner of the applicant if the applicant is a partnership, shall:

(a) Pass the uniform investment adviser law examination (series 65); or the uniform combined state law examination (series 66); and

(b)(i) Pass the NASD general securities principal examination (series 24); or

(ii) Hold one of the following designations:

(A) Chartered investment counselor;

(B) Chartered financial analyst;

(C) Certified financial planner;

(D) Chartered financial consultant;

(E) Personal financial specialist;

(F) Certified investment management analyst; and

(c) File a completed Form ADV.))

(2) If the individual officer who takes the examination on behalf of a corporate applicant or the individual general partner who takes the examination on behalf of a partnership ceases to be an officer or general partner, then the investment adviser must notify the securities division of a substitute officer or general partner who has passed the examinations required in subsection (1) of this section within two months in order to maintain the investment adviser license.

(3) In order to become licensed in this state as an investment adviser salesperson (representative), an applicant shall:

(a) Pass the uniform investment adviser law examination (series 65); or the uniform combined state law examination (series 66); and

(b)(i) Pass the NASD general securities representative examination (series 7); or

(ii) Pass the general securities representative examination (series 2); or

(iii) Hold one of the following designations:

(A) Chartered investment counselor;

(B) Chartered financial analyst;

(C) Certified financial planner;

(D) Chartered financial consultant;

(E) Personal financial specialist;

(F) Certified investment management analyst; and

(c) File a completed Form U-4.

(4) The administrator may waive the testing requirements in subsection (3) of this section for an investment adviser representative whose activities will be limited to supervising the firm's investment advisory activities in Washington, provided that the applicant has been employed for five years preceding the filing of the application in a supervisory capacity, or as a portfolio manager, by an investment adviser registered under the Investment Advisers Act of 1940 for at least five years and the investment adviser has been engaged in rendering "investment supervisory services" as defined in section 202 (a)(13) of the Investment Advisers Act of 1940.

(5) Any individual who has been retained or employed by an investment adviser to solicit clients or offer the services of the investment adviser or manage the accounts of said clients any time during the two years prior to application and who has previously passed the required examination in subsection (1) or (3) of this section or the Washington state investment advisers examination shall not be required to retake the examination(s) to be eligible to be relicensed as an investment adviser salesperson (representative) upon application.))

(1) Examination requirements. A person applying to be registered as an investment adviser or investment adviser representative under RCW 21.20.040 shall provide the director with proof that he or she has obtained a passing score on one of the following examinations:

(a) The Uniform Investment Adviser Law Examination (Series 65 examination); or

(b) The General Securities Representative Examination (Series 7 examination) and the Uniform Combined State Law Examination (Series 66 examination).

(2) Grandfathering. (a) Any individual who is registered as an investment adviser or investment adviser representative in any jurisdiction in the United States on the effective date of this amended rule shall not be required to satisfy the examination requirements for initial or continued registration, provided that the jurisdiction required an examination as a condition of registration, and further provided that the director may require additional examinations for any individual found to have violated the Securities Act of Washington, Chapter 21.20 RCW, or the Uniform Securities Act. (b) An individual who has not been registered in any jurisdiction for a period of two (2) years shall be required to comply with the examination requirements of subsection (1).

(3) Waivers. The examination requirements shall not apply to an individual who currently holds one of the following professional designations:

(a) Certified Financial Planner (CFP) issued by the Certified Financial Planner Board of Standards, Inc.;

(b) Chartered Financial Consultant (ChFC) awarded by The American College, Bryn Mawr, Pennsylvania;

(c) Personal Financial Specialist (PFS) administered by the American Institute of Certified Public Accountants;

(d) Chartered Financial Analyst (CFA) granted by the Association for Investment Management and Research;

(e) Chartered Investment Counselor (CIC) granted by the Investment Counsel Association of America; or

(f) Such other professional designation as the director may by order recognize.

(4) If the person applying for registration as an investment adviser is any entity other than a sole proprietor, an officer, general partner, managing member, or other equivalent person of authority in the entity may take the examination on behalf of the entity. If the person taking the examination ceases to be a person of authority in the entity, then the investment adviser must notify the director of a substitute person of authority who has passed the examinations required in subsection (1) of this section within two months in order to maintain the investment adviser license.

(5) A person applying for registration as an investment adviser or investment adviser representative who is not registered in any jurisdiction in the United States on the effective date of this amended rule, and who passed the Series 65 examination prior to January 1, 2000, must also provide proof that he or she has passed the Series 7 examination. For purposes of this subsection, applicants passing examinations prior to January 1, 1998 without becoming registered in any jurisdiction in the United States must comply with current examination requirements.

(6) Registration requirements. (a) A person applying to be registered as an investment adviser shall submit: (i) proof of complying with the examination or waiver requirements specified in subsections (1) through (5) above; (ii) a completed Form ADV; (iii) a financial statement demonstrating compliance with the requirements of WAC 460-24A-170, if necessary; (iv) the application fee specified in RCW 21.20.340; and (v) such other documents as the director may require. (b) A person applying to be registered as an investment adviser representative shall submit: (i) proof of complying with the examination or waiver requirements specified in subsections (1) through (5) above; (ii) a completed Form U-4; the application fee specified in RCW 21.20 340; and (iv) such other documents as the director may require.

[Statutory Authority: RCW 21.20.450.  97-16-050, 460-24A-050, filed 7/31/97, effective 8/31/97.  Statutory Authority: RCW 21.20.450 and 21.20.070.  95-16-026 and 95-17-002, 460-24A-050, filed 7/21/95 and 8/2/95, effective 8/21/95 and 9/2/95.  Statutory Authority: RCW 21.20.070 and 21.20.450.  90-05-003, 460-24A-050, filed 2/9/90, effective 3/12/90; 89-17-077 (Order SD0-123-89), 460-24A-050, filed 8/17/89, effective 9/17/89.  Statutory Authority: RCW 21.20.450.  85-23-063 (Order SDO-220-85), 460-24A-050, filed 11/19/85; 85-16-068 (Order SDO-128-85), 460-24A-050, filed 8/1/85.  Statutory Authority: RCW 21.20.450 and 21.20.040.  83-03-024 (Order SDO-6-83), 460-24A-050, filed 1/13/83.  Statutory Authority: RCW 21.20.450.  82-02-033 (Order SDO-149-81), 460-24A-050, filed 12/31/81; Order SD-131-77, 460-24A-050, filed 11/23/77; Order 304, 460-24A-050, filed 2/28/75, effective 4/1/75.  Formerly chapter 460-24 WAC.]

Reviser's note: The bracketed material preceding the section above was supplied by the code reviser's office.

Reviser's note: The typographical errors in the above section occurred in the copy filed by the agency and appear in the Register pursuant to the requirements of RCW 34.08.040.

AMENDATORY SECTION [(Amending WSR 99-03-050, filed 1/15/99)]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)) RCW 21.20.020(3) 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.

[Statutory Authority: RCW 21.20.450 and 1998 c 15 2.  99-03-050, 460-24A-110, filed 1/15/99, effective 2/15/99.]

Reviser's note: The bracketed material preceding the section above was supplied by the code reviser's office.

Reviser's note: The typographical error in the above section occurred in the copy filed by the agency and appears in the Register pursuant to the requirements of RCW 34.08.040.

AMENDATORY SECTION [(Amending WSR 93-20-012, filed 9/23/93)]WAC 460-24A-150
Performance compensation arrangements.

An investment adviser may, without violating RCW 21.20.030(1), enter into a performance compensation arrangement with a customer that complies with Securities and Exchange Commission Rule 205-3, as made effective in Release No. IA-996 and as amended in Release No. IA-1731, under the Investment Advisers Act of 1940.  Rule 205-3 is found in the CCH Federal Securities Law Reports published by Commerce Clearing House.  Copies of the rule are also available at the office of the securities administrator.

[Statutory Authority: RCW 21.20.450 and 1993 c 114.  93-20-012, 460-24A-150, filed 9/23/93, effective 10/24/93.]

Reviser's note: The bracketed material preceding the section above was supplied by the code reviser's office.

Washington State Code Reviser's Office