WSR 98-22-015
PROPOSED RULES
DEPARTMENT OF
FINANCIAL INSTITUTIONS
[Filed October 23, 1998, 1:41 p.m.]
Original Notice.
Preproposal statement of inquiry was filed as WSR 98-15-124.
Title of Rule: New section WAC 460-24A-110 Agency cross transactions.
Purpose: To adopt new section WAC 460-24A-200 to make the rules relating to investment advisers uniform among the states and to conform regulation of investment advisers with federal statutes and regulations.
Other Identifying Information: NASAA Uniform Rule 102(f)-1.
Statutory Authority for Adoption: Section 2, chapter 15, Laws of 1998, RCW 21.20.450.
Statute Being Implemented: Chapter 21.20 RCW.
Summary: This rule is being proposed to adopt a rule to require investment advisers and certain affiliates, who act as the principal or effect transactions between clients, to disclose the capacity in which the investment adviser or affiliate is acting and to obtain the consent of the client prior to execution of the transaction at issue.
Reasons Supporting Proposal: The proposed rule is intended to protect investors who conduct business with state regulated investment advisers. The proposed rule will foster uniformity with other jurisdictions and conform to federal statutes and regulations.
Name of Agency Personnel Responsible for Drafting: Marlo DeLange, 210 11th Avenue S.W., Olympia, WA, (360) 902-8722; Implementation: John L. Bley, 210 11th Avenue S.W., Olympia, WA, (360) 902-8722; and Enforcement: Deborah Bortner, 210 11th Avenue S.W., Olympia, WA, (360) 902-8722.
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: Section 2, chapter 15, Laws of 1998, requires investment adviser and certain affiliates of the adviser, who act as the principal or effect transactions between clients, to disclose the capacity in which the investment adviser or affiliate is acting and to obtain the consent of the client prior to execution of the transaction at issue. The proposed rule provides conditions, if met, in which the investment is deemed to be in compliance with section 2, chapter 15, Laws of 1998.
Proposal does not change existing rules.
No small business economic impact statement has been prepared under chapter 19.85 RCW. The adoption of the rule is being proposed solely for the purpose of conformity with federal statute and regulations and NASAA uniform rules. Specifically, Section 303 Improved Supervision Through State and Federal Cooperation, of Title III of the 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 proposal regulates investment advisers not otherwise regulated by the SEC and, is the equivalent of 17 C.F.R. 275.206(3)-2, promulgated under the Investment Advisers Act of 1940. The proposal adopts, without material change, the federal regulation and the NASAA uniform rule, which was adopted by NASAA with a notice and comment procedure in the industry.
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, Securities Division, Executive Conference Room, 300 General Administration Building, 210 11th Avenue S.W., Olympia, WA 98504, on December 15, 1998, at 1:00 p.m.
Assistance for Persons with Disabilities: Contact Darlene Christianson by December 14, 1998, TDD (360) 664-8126, or (360) 902-8760.
Submit Written Comments to: Marlo DeLange, P.O. Box 9033, Olympia, WA 98507-9033, fax (360) 586-5068, by December 14, 1998.
Date of Intended Adoption: January 15, 1999.
October 21, 1998
John L. Bley
Director
NEW SECTION
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.
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