Utah Department of Administrative Services Division of Administrative Rules

File No. 34121

This rule was published in the October 15, 2010, issue (Vol. 2010, No. 20) of the Utah State Bulletin.


Commerce, Securities

Section R164-2-2

Custody Requirements for Investment Advisers

Notice of Proposed Rule

(Amendment)

DAR File No.: 34121
Filed: 09/28/2010 01:10:56 PM

RULE ANALYSIS

Purpose of the rule or reason for the change:

This proposal sets forth requirements for investment advisers who have custody of client funds or securities. Specifically, the proposal formally adopts and incorporates by reference the 2010 amended federal rule governing custody, Rule 206(4)-2 of the Investment Advisers Act of 1940, and provides that, like the federal rule, failure to comply with Rule 206(4)-2 is a fraudulent, deceptive, or manipulative act, practice, or course of business. The Division notes that failure to comply with Rule 206(4)-2 is currently already a dishonest or unethical business practice as set forth in Utah Admin. Code Rule R164-6-1g(E)(20). The purpose of this proposal is to expressly incorporate the requirements of the federal rule so that investment advisers who have custody of client funds or securities can ensure compliance with the rule.

Summary of the rule or change:

In light of recent securities fraud trends, this rule provides additional safeguards to protect investors by requiring that investment advisers with access to client funds and securities undergo annual examinations by an independent public accountant to verify client assets, and requires that qualified custodians maintaining client funds and securities send account statements directly to the clients, and, unless client assets are maintained by an independent custodian unrelated to the investment adviser, requires a report by an independent public accountant evaluating the adviser's internal controls relating to the custody of client assets. These heightened requirements for those advisers who have access to client funds or securities are intended to prevent the misappropriation or other misuse of investor assets.

State statutory or constitutional authorization for this rule:

  • Section 61-1-24
  • Section 61-1-2

This rule or change incorporates by reference the following material:

  • Adds 17 CFR 275.206(4)-2, published by Government Printing Office, 03/12/2010

Anticipated cost or savings to:

the state budget:

There will be no additional costs or savings to the state budget because the proposal does not affect any state entities.

local governments:

There will be no additional costs or savings to local government because the proposal does not affect any local governmental entities.

small businesses:

Investment advisers with custody of client funds or securities are already subject to the heightened reporting requirements of Rule 206(4)-2 because it is a dishonest or unethical practice under the Utah Uniform Securities Act to fail to comply with the rule. Likewise, any formerly federal covered advisers which become state covered as a result of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act will already have been required to comply with the federal rule and thus there will be no change for such advisers.

persons other than small businesses, businesses, or local governmental entities:

Investment advisers with custody of client funds or securities are already subject to the heightened reporting requirements of Rule 206(4)-2 because it is a dishonest or unethical practice under the Utah Uniform Securities Act to fail to comply with the rule. Likewise, any formerly federal covered advisers which become state covered as a result of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act will already have been required to comply with the federal rule and thus there will be no change for such advisers.

Compliance costs for affected persons:

As indicated above, affected persons should already be in compliance with the requirements of the proposed rule amendment as a result of the 2010 amendments to federal Rule 206(4)-2 of the Investment Advisers Act of 1940, which became effective 03/12/2010. In the rulemaking process, the United States Securities and Exchange Commission (SEC) reviewed more than 1,300 comment letters from the public, many of which were from those in the securities industry who are affected by the rule. For additional information see http://edocket.access.gpo.gov/2010/pdf/2010-18.pdf

Comments by the department head on the fiscal impact the rule may have on businesses:

This proposal, which furthers the goal of safekeeping and protecting investor funds and securities, expressly adopts and incorporates by reference recent federal rule amendments governing investment advisers who have access to client funds and securities. As described above, investment advisers licensed in Utah already must comply with Rule 206(4)-2. In addition, as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, some affected advisers will have already been required to comply with the federal rule and therefore there will be no additional costs to such persons.

Francine A. Giani, Executive Director

The full text of this rule may be inspected, during regular business hours, at the Division of Administrative Rules, or at:

Commerce
Securities
160 E 300 S
SALT LAKE CITY, UT 84111-2316

Direct questions regarding this rule to:

  • Charles Lyons at the above address, by phone at 801-530-6940, by FAX at 801-530-6980, or by Internet E-mail at clyons@utah.gov
  • Keith Woodwell at the above address, by phone at 801-530-6606, by FAX at 801-530-6980, or by Internet E-mail at kwoodwell@utah.gov

Interested persons may present their views on this rule by submitting written comments to the address above no later than 5:00 p.m. on:

11/15/2010

This rule may become effective on:

11/22/2010

Authorized by:

Keith Woodwell, Director

RULE TEXT

R164. Commerce, Securities.

R164-2. Investment Adviser - Unlawful Acts.

R164-2-2. Custody Requirements for Investment Advisers.

(A) Authority and purpose

(1) The Division enacts this rule under authority granted by Sections 61-1-2 and 61-1-24.

(2) This rule sets forth the requirements for investment advisers with custody of client funds or securities.

(B) It is unlawful and deemed to be a fraudulent, deceptive, or manipulative act, practice or course of business for an investment adviser licensed or required to be licensed under Section 61-1-3 to have custody of client funds or securities unless the investment adviser complies with the requirements of Rule 206(4)-2 of the Investment Advisers Act of 1940 (amended 2010), which is adopted and incorporated by reference.

(C) For purposes of this rule and any determination of whether an investment adviser has custody of client funds or securities, "custody" is defined as in Rule 206(4)-2(d)(2) of the Investment Advisers Act of 1940.

 

KEY: securities, securities regulation, investment advisers, custody requirements

Date of Enactment or Last Substantive Amendment: [March 20, 2000]2010

Notice of Continuation: February 16, 2010

Authorizing, and Implemented or Interpreted Law: 61-1-2; 61-1-24

 


Additional Information

The Portable Document Format (PDF) version of the Bulletin is the official version. The PDF version of this issue is available at http://www.rules.utah.gov/publicat/bull-pdf/2010/b20101015.pdf. The HTML edition of the Bulletin is a convenience copy. Any discrepancy between the PDF version and HTML version is resolved in favor of the PDF version.

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For questions regarding the content or application of this rule, please contact Charles Lyons at the above address, by phone at 801-530-6940, by FAX at 801-530-6980, or by Internet E-mail at clyons@utah.gov; Keith Woodwell at the above address, by phone at 801-530-6606, by FAX at 801-530-6980, or by Internet E-mail at kwoodwell@utah.gov.