Haw. Code R. § 16-39-433 - Financial requirements

(a) An investment adviser registered or required to be registered, who does not have custody of client funds or securities, and who does not have discretionary authority over client funds or securities, shall maintain a minimum net worth of $5,000 at all times.

(b) An investment adviser registered or required to be registered, who has custody of client funds or securities shall maintain a minimum net worth of $35,000 at all times except:

(1) Investment advisers that have custody solely due to their authority to deduct fees from client accounts and comply with the terms described in section 16-39-436 and related books and records shall only be required to maintain a minimum net worth of $5,000 at all times; or

(2) Investment advisers to pooled investment vehicles that have custody solely due to the capacity in which they act in advising pooled investment vehicles and comply with the terms described in section 16-39-436 and related books and records shall only be required to maintain a minimum net worth of $5,000 at all times.

(c) An investment adviser, registered or required to be registered, who has discretionary authority over client funds or securities, but does not have custody of client funds or securities, shall maintain a minimum net worth of $10,000 at all times.

(d) Unless otherwise exempted, as a condition of the right to transact business in this State, every investment adviser registered or required to be registered shall notify the commissioner if the adviser's net worth is less than the minimum required by the close of business on the next business day. After transmitting the notice, each investment adviser shall file a report with the commissioner of its financial condition by the close of business on the next business day, including the following:

(1) A trial balance of all ledger accounts;

(2) A statement of all client funds or securities that are not segregated;

(3) A computation of the aggregate amount of client ledger debit balances; and

(4) A statement as to the number of client accounts.

(e) For purposes of this chapter, the term "net worth" means an excess of assets over liabilities, as determined by generally accepted accounting principles computed in accordance with the following:

(1) Securities owned shall be adjusted to market value;

(2) The value of real estate shall be attested to by qualified and disinterested persons; and

(3) Property in joint ownership shall be limited to the applicant's interest therein.

(f) For purposes of this chapter, "net worth" shall not include the following as assets:

(1) Prepaid expenses (except as to items properly classified as assets under generally accepted accounting principles);

(2) Deferred charges, goodwill, franchise rights, organizational expenses, patents, copyrights, marketing rights, unamortized debt discount and expense and all other intangible assets;

(3) Homes, home furnishings, automobiles, and any other personal items not readily marketable in the case of an individual;

(4) Advances or loans to stockholders and officers in the case of a corporation;

(5) Advances or loans to partners in the case of a partnership; or

(6) Advances or loans to managers or members in the case of a limited liability company.

(g) For purposes of this section, custody shall be defined as provided in section 16-39-436.

(h) For purposes of this section, an investment adviser shall not be deemed to be exercising discretion when the investment adviser places trade orders with a broker-dealer pursuant to a third-party trading agreement if:

(1) The investment adviser has executed a separate investment adviser contract exclusively with its client which acknowledges that a third-party trading agreement will be executed to allow the investment adviser to effect securities transactions for the client in the client's broker-dealer account;

(2) The investment adviser contract specifically states that the client does not grant discretionary authority to the investment adviser and the investment adviser in fact does not exercise discretion with respect to the account; and

(3) A third-party trading agreement is executed between the client and a broker-dealer which specifically limits the investment adviser's authority in the client's broker-dealer account to the placement of trade orders and deduction of investment adviser fees.

(i) The commissioner may require that a current appraisal be submitted in order to establish the worth of any asset.

(j) Every investment adviser that has its principal place of business in a state other than this State shall be required to maintain only such minimum net worth as required by the state in which the investment adviser maintains its principal place of business, provided that the investment adviser is licensed in such state and is in compliance with such state's minimum net worth requirements, if any.

Notes

Haw. Code R. § 16-39-433

[Eff 6/30/08] (Auth: HRS §§ 485A-406, 485A-411, 485A-606) (Imp: HRS §§ 485A-406, 485A-411) Am and comp 11/18/2023