950 CMR 12.205 - Investment Advisers and Federal Covered Advisers
(1)
Definition of Investment
Adviser.
(a)950 CMR 12.205(1)
shall cover the exclusions from the definition of investment adviser, as set
forth in M.G.L. c. 110A, § 401(m) (Note: These definitions
cover only the exclusions from the definition of investment adviser and do not
pertain to other parts of the regulations):
1.
Incidental shall mean occurring as a fortuitous or
minor concomitant.
2. An investment
adviser exercises investment discretion with respect to an account if, directly
or indirectly, the investment adviser:
a. Is
authorized to determine what securities or other property shall be purchased or
sold by or for the account; or
b.
Makes decisions as to what securities or other property shall be purchased or
sold by or for the account even though some other person (including the client)
may have responsibility for those investment decisions.
3.
The Registered Broker-dealer
Agent exclusion from the definition of "investment adviser" shall
apply only to activities performed within the scope of the agency relationship,
i.e., to activities of the agent performed under the control
and supervision of the broker-dealer. Note: If an agent conducts
an investment advisory business outside the control and supervision of the
registered broker-dealer, that agent cannot claim the exclusion from the
definition of investment adviser by virtue of being a registered agent of such
broker-dealer.
5.
Affiliate of a
qualified institutional buyer (QIB) means a person that directly, or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with, the QIB.
6.
Institutional
Buyer, for the purposes of M.G.L. c. 110A, § 401(m), shall
include any of the following:
a. An
organization described in Section 501(c)(3) of the Internal Revenue Code with a
securities portfolio of more than $25 million.
b. An investing entity:
i. whose only investors are accredited
investors as defined in Rule 501(a) under the Securities Act of 1933 (
17 CFR
230.501(a) ) each of whom
has invested a minimum of $50,000; and
ii. the subject fund existed prior to
February 3, 2012; and
iii. as of
February 3, 2012, the subject fund ceased to accept new beneficial
owners.
iv.950 CMR 12.205(1)(a)6.b.
shall be enforced as of August 3, 2012.
7.
Solicitation. A registered broker-dealer or agent
shall not be deemed to be soliciting, offering or negotiating for the sale or
selling investment advisory services if it refers its customers as part of a
wrap-fee, asset allocation, market-timing program or otherwise to a registered
investment adviser.
(b)
The following entities are excluded by designation of the Secretary from the
definition of investment adviser and federal covered adviser:
1. Any instrumentality created by the
Commonwealth whose mission is to assist Massachusetts businesses in obtaining
finance to start and expand. Such instrumentalities shall include the
Massachusetts Technology Development Corporation, the Massachusetts Community
Development Finance Corporation, the Massachusetts Industrial Services Program,
the Massachusetts Industrial Finance Agency and the Massachusetts Government
Land Bank.
2. Any entity having a
place of business in the Commonwealth but having no clients located in the
Commonwealth, so long as such entity is registered as an investment adviser in
at least one jurisdiction where it does have clients or with the U.S.
Securities and Exchange Commission (SEC).
3. A corporate general partner of a limited
partnership if the limited partnership is registered as an investment adviser
and any employee of the corporate general partner providing investment advice
to or on behalf of the limited partnership is registered as an investment
adviser representative of the limited partnership.
4. A person who has no office or other
physical presence in the Commonwealth, and has had fewer than six clients in
the Commonwealth during the preceding 12 months.
(2)
Registration and Notice
Filing Requirements and Private Fund Exemption.
(a)
Registration of Investment
Advisers.
1. Pursuant to M.G.L.
c. 110A, § 202(a), the Secretary designates the web-based Investment
Adviser Registration Depository (IARD) and the Central Registration Depository
(CRD) both operated by FINRA to receive and store filings and collect related
fees from investment advisers and investment adviser representatives on behalf
of the Securities Division of the Office of the Secretary of the Commonwealth
(Division). All applications for initial registration as an investment adviser
shall be made via the IARD located at www.iard.com. (Any documents required to be filed
with the Division that cannot be accepted by the IARD, including, but not
limited to, the section 202(a) affidavit described in 950 CMR 12.205(2)(a)2.
shall be filed directly with the Division.) Each application for registration
as an investment adviser shall contain:
a.
The Form ADV, including all parts and schedules.
b. If required by 950 CMR 12.205(5)(a), a
surety bond evidencing compliance with the minimum financial requirements set
forth in 950 CMR 12.205(5).
c. A
Form U-4 for each person listed on Schedule A or Schedule B of Form ADV as a
sole proprietor, executive officer, director, partner or controlling member (or
person occupying a similar status or performing similar functions).
d. A non-refundable registration fee of
$300.
e. A non-refundable
registration fee of $50 for each person listed on Schedule A or Schedule B of
the Form ADV as a sole proprietor, executive officer, director, partner,
controlling member (or person occupying a similar status or performing similar
functions), unless such person, other than a sole proprietor, files an
affidavit described in 950 CMR 12.205(2)(a)2. (See950 CMR
12.205(2)(d) for investment adviser representative registration requirements.)
Note: Each executive officer, director, partner, controlling
member, (or person performing similar functions) listed on Schedule A or
Schedule B of the Form ADV or sole proprietor who acts as an investment adviser
representative is automatically registered as an investment adviser
representative when the investment adviser's application is made
effective.
2. Each
executive officer, director, partner, controlling member or sole proprietor (or
person occupying a similar status or performing similar functions) is presumed
to be acting as an investment adviser representative and thus registered
automatically unless such person, other than a sole proprietor, files with the
Division an affidavit stating that he or she performs no activity for the
investment adviser that would require him or her to register as an investment
adviser representative. Such affidavit shall be in substantially the following
form: "The undersigned hereby swears or affirms that as an [executive officer,
director, partner, controlling member (or person occupying a similar status or
performing similar functions)] of [name of investment adviser], I (a) make no
recommendations nor otherwise render advice regarding securities; (b) do not
manage accounts or portfolios for clients; (c) do not determine which
recommendations or advice regarding securities should be given; (d) neither
solicit, offer nor negotiate the sale of investment advisory services; and, (e)
do not supervise any employee who performs any of the foregoing
activities."
3. Every registration
as an investment adviser shall expire on December
31st. An investment adviser registration shall be
renewed annually via the IARD located at www.iard.com. The renewal application shall contain:
a. The information requested by the
IARD.
b. The information requested
by the CRD for each investment adviser representative whose registration is
being renewed. (See950 CMR 12.205(2)(c)2.)
c. A non-refundable registration fee of $300
for the investment adviser and non-refundable registration fees of $50 for each
investment adviser representative.
(b)
Notice Filing Procedures for
Federal Covered Advisers.
1.
Pursuant to M.G.L. c. 110A, § 202(a), the Secretary designates the
web-based Investment Adviser Registration Depository (IARD) and the Central
Registration Depository (CRD) both operated by FINRA to receive and store
filings and collect related fees from Federal Covered Advisers and investment
adviser representatives on behalf of the Securities Division of the Office of
the Secretary of the Commonwealth (Division). Each Federal Covered Adviser
required to provide notice shall file the following with the Division via the
IARD located at www.iard.com.
a. A copy of its complete, most recent, Form
ADV, including all parts and schedules, on file with the U.S. Securities and
Exchange Commission.
b. A
non-refundable notice-filing fee of $300.
c. A non-refundable registration fee of $50
for each investment adviser representative required to be registered in
Massachusetts. (See950 CMR 12.205(2)(d) for investment adviser
representative registration requirements.)
2. Each Federal Covered Adviser's status as a
notice filer shall expire on December 31st and must
be renewed annually via the IARD located at www.iard.com. The renewal application shall contain:
a. The information requested by the
IARD.
b. The information requested
by the CRD for each investment adviser representative whose registration is
being renewed. (See950 CMR 12.205(2)(d)2.)
c. A non-refundable notice-filing fee of $300
for the investment adviser and a non-refundable registration fee of $50 for
each investment adviser representative.
(c)
Registration Exemption for
Certain Private Fund Advisers.
1.
Definitions. For purposes of 950 CMR 12.205(2)(c), the
following definitions shall apply:
a.
Value of Primary Residence means the fair market value
of a person's primary residence, less the amount of debt secured by the
property up to its fair market value.
b.
Private Fund
Adviser means an investment adviser who provides advice solely to
one or more private funds.
c.
Private Fund means an issuer that qualifies for an
exclusion from the definition of an investment company pursuant to section(s)
3(c)(1) or 3(c)(7) of the Investment Company Act of 1940, 15 U.S.C.
80a.
d.
3(c)(1)
Fund means a private fund that qualifies for an exclusion from the
definition of an investment company pursuant to section 3(c)(1) of the
Investment Company Act of 1940, 15 U.S.C. 80a-
3(c)(1).
e.
3(c)(7) Fund
means a private fund that qualifies for an exclusion from the definition of an
investment company pursuant to section 3(c)(7) of the Investment Company Act of
1940, 15 U.S.C. 80a-
3(c)(7).
f.
Venture Capital
Fund means a private fund that meets the definition of a venture
capital fund in SEC Rule 203(l)-1, 17 C.F.R. § 275.203(l)-1.
2.
Exemption for
Private Fund Advisers. Subject to the additional requirements of
950 CMR 12.205(2)(c)3., a private fund adviser shall be exempt from the
registration requirements of M.G.L. c. 110A, § 201 if the private fund
adviser satisfies all of the following conditions:
a. neither the private fund adviser nor any
of its advisory affiliates are subject to a disqualification as described in
Rule 262 of SEC Regulation A,
17 C.F.R. §
230.262;
b. the private fund adviser files with the
state each report and amendment thereto that an exempt reporting adviser is
required to file with the Securities and Exchange Commission pursuant to SEC
Rule 204-4,
17 C.F.R. §
275.204-4; and
c. the private fund adviser pays a $300
reporting fee.
3.
Additional requirements for private fund advisers to certain 3(c)(1) funds. In
order to qualify for the exemption described in 950 CMR 12.205(2)(c)2., a
private fund adviser who advises at least one 3(c)(1) fund that is not a
venture capital fund nor a 3(c)(7) fund shall, in addition to satisfying each
of the conditions specified in 950 CMR 12.205(2)(a) through (c), comply with
the following requirements:
a. The private
fund adviser shall advise only those 3(c)(1) funds (other than venture capital
funds or 3(c)(7) funds) whose outstanding securities (other than short-term
paper) are beneficially owned solely by persons who, after deducting the value
of the primary residence from the person's net worth, would each meet the
definition of a qualified client in SEC Rule 205-3,
17
C.F.R. §
275.205-3, at the time the
securities are purchased from the issuer;
b. At the time of purchase, the private fund
adviser shall disclose the following in writing to each beneficial owner of a
3(c)(1) fund that is not a venture capital fund nor a 3(c)(7) fund:
i. all services, if any, to be provided to
individual beneficial owners. If no services are to be provided to individual
beneficial owners, that fact must be disclosed;
ii. all duties, if any, the investment
adviser owes to the beneficial owners. If no duties are owed to individual
beneficial owners, that fact must be disclosed; and
iii. any other material information affecting
the rights or responsibilities of the beneficial owners.
c. The private fund adviser shall obtain on
an annual basis audited financial statements of each 3(c)(1) fund that is not a
venture capital fund nor a 3(c)(7) fund, and shall deliver a copy of such
audited financial statements to each beneficial owner of the fund.
4.
Federal Covered
Investment Advisers. If a private fund adviser is registered with
the Securities and Exchange Commission, the adviser shall comply with the state
notice filing requirements applicable to federal covered investment advisers in
M.G.L. c. 110A, § 202(b).
5.
Investment Adviser Representatives. A person acting as
an investment adviser representative is exempt from the registration
requirements of M.G.L. c. 110A, § 201 if he or she is employed by or
associated with an investment adviser that is exempt from registration in the
Commonwealth pursuant to 950 CMR 12.205(2) and does not otherwise act as an
investment adviser representative.
6.
Electronic
Filing. The report filings described in 950 CMR 12.205(2)(b) shall
be made electronically through the IARD. A report shall be deemed filed when
the report and the fee are filed and accepted by the IARD on the behalf of the
Securities Division.
7.
Grandfathering for Private Fund Advisers with Non-qualified
Clients. A private fund adviser to one or more 3(c)(1) funds that
is not a venture capital fund nor a 3(c)(7) fund that is beneficially owned by
persons who are not qualified clients as described in 950 CMR 12.205(2)(c)3.a.
may nonetheless qualify for the exemption described in 950 CMR 12.205(2)(c) if:
a. the subject fund(s) existed prior to
February 3, 2012; and
b. as of
February 3, 2012, the fund(s) cease(s) to accept beneficial owners who are not
qualified clients, as described in 950 CMR 12.205(2)(c)3.a.; and
c. the private fund adviser to the subject
fund(s) was in compliance with the requirements of M.G.L. c. 110A § 201(c)
as of February 3, 2012; and
d. the
private fund adviser discloses in writing the information described in 950 CMR
12.205(2)(c)3.b. to all beneficial owners of the fund(s); and
e. the adviser delivers audited financial
statements as required by 950 CMR 12.205(3)(c).
(d)
Registration of Investment
Adviser Representatives.
1.
Pursuant to M.G.L. c. 110A, § 202(a) the Secretary designates the
web-based Central Registration Depository (CRD) operated by FINRA to receive
and store filings and collect related fees from investment adviser
representatives on behalf of the Securities Division of the Office of the
Secretary of the Commonwealth (Division). All applications for initial
registration as an investment adviser representative shall be made via the CRD,
which may be located through www.iard.com
(any documents required to be filed that cannot be accepted by the CRD,
including, but not limited to, the Acknowledgement Form described in 950 CMR
12.205(2)(d)1.d. shall be filed directly with the Division). The application
shall contain:
a. A complete, current Form
U-4 indicating Massachusetts as a jurisdiction.
b. A non-refundable registration fee of
$50.
c. Proof of meeting the
examination or certification requirements of 950 CMR 12.205(4).
d. A Criminal Offender Record Information
(CORI) Acknowledgement Form, or other similar form, necessary for the Division
to obtain the applicant's Criminal Offender Record Information through the
Massachusetts Department of Criminal Justice Information Services.
2. Every registration as an
investment adviser representative shall expire on December
31st. An investment adviser representative
registration shall be renewed annually via the CRD, which may be located
through www.iard.com, and shall contain:
a. The information requested by the
CRD.
b. A non-refundable
registration fee of $50.
3. Renewal registration of an investment
adviser representative shall be accomplished through the investment adviser or
the Federal Covered Adviser.
(3)
Withdrawals, Terminations and
Transfers.
(a) An investment
adviser which seeks to withdraw its registration pursuant to M.G.L. c. 110A,
§ 204(e), or a Federal Covered Adviser which seeks to terminate its notice
filing status shall file with the Division, via the IARD located at
www.iard.com, Form ADV-W in accordance with
the instructions contained therein.
(b) An investment adviser or a Federal
Covered Adviser which seeks to terminate the registration of an investment
adviser representative employed or associated with it, shall file with the
Division, via the CRD which may be located through www.iard.com, a Form U-5 prepared in accordance with
the instructions contained therein. The investment adviser or the Federal
Covered Adviser shall send a copy of the Form U-5 to the terminated employee
within five days after it is filed with the Division.
(c) An investment adviser or a Federal
Covered Adviser shall notify the Division that it intends to employ or
associate with an investment adviser representative currently registered in the
Commonwealth by filing a Form U-4 with the Division, via the CRD which may be
located through www.iard.com, for such
representative. Such filing will be considered a new application under M.G.L.
c. 110A, § 202. If the application discloses no affirmative responses to
the disclosure item of Form U-4, the investment adviser or Federal Covered
Adviser may request that the effective date of the registration be
accelerated.
(4)
Examination or Certification Requirement.
(a) Each individual submitting an initial
application for registration as an investment adviser representative in the
Commonwealth shall demonstrate compliance with either 950 CMR 12.205(4)(a)1. or
2.
1. Currently hold the professional
designation of Certified Financial Planner (CFP) awarded by the Certified
Financial Planner Board of Standards, Inc.; Chartered Financial Analyst (CFA)
awarded by the Institute of Chartered Financial Analysts; Chartered Financial
Consultant (ChFC) awarded by the American College, Bryn Mawr, PA; Chartered
Investment Counselor (CIC) awarded by the Investment Counsel Association of
America, Inc.; or Personal Financial Specialist (PFS) awarded by the American
Institute of Certified Public Accountants.
2. Have obtained a passing score on the
examination(s) in one of the following:
(1)
The Uniform Investment Adviser Law Examination (the Series 65 examination); or
(2) the Uniform Combined State Law
Examination (the Series 66 examination) and the General Securities
Representative Examination (the Series 7 examination of FINRA).
Note: The Division will accept in place of the Series 7
examination (i) a passing score on the Series 2 examination formerly
administered by FINRA, (ii) successful completion of an academic program at an
accredited institution of higher education leading to a degree or certificate
in financial planning (or its equivalent) or an academic program at an
accredited institution of higher education leading to a degree in a subject
involving significant financial and investment analysis, or (iii) successful
completion of a nationally recognized examination or course of study
specifically designed in part or whole for investment advisers or financial
planners such as: any part of the CFA examination administered by the Institute
of Chartered Financial Analyst (now known as AIMR); the examination for course
HS328 of the Chartered Financial Consultant Examination administered by the
American College of Bryn Mawr; the examination for the course currently known
as CFPE 1102, Investment Planning, offered by the College for Financial
Planning administered by the Certified Financial Planner Board of Standards,
Inc.; the examination required for the admission to the Registry of Financial
Planning Practitioners administered by the IAFP; the examination required for
the designation Certified Investment Management Consultant administered by the
Institute for Investment Management Consultants; the examinations required for
the designation Certified Fund Specialist administered by The Institute of
Certified Fund Specialists; the examination required for the designation
Certified Investment Management Analyst administered by the Investment
Management Consultants Association; and the examinations required for the
designation Chartered Pension Professional administered by The Institute of
Chartered Pension Professionals.
(b) Any individual who is registered as an
investment adviser or investment adviser representative in any jurisdiction in
the United States on December 9, 1999 shall not be required to satisfy the
examination requirement for continued registration, unless notified otherwise
by the Director, except that the Director may require additional examinations
for any individual found to have violated any state or federal securities law.
Notwithstanding 950 CMR 12.205(4)(b), any individual who has not been
registered in any jurisdiction for a period of two years shall be required to
comply with 950 CMR 12.205(4)(a) or (c).
(c) The Director may waive the examination or
certification requirement if the applicant demonstrates, in writing, one of the
following:
1. The individual functions solely
as a solicitor for new clients.
2.
The individual's duties do not pertain directly or indirectly to clients
located in the Commonwealth.
3. The
individual renders investment advisory services solely by means of written
material or oral statements that do not purport to meet the objectives or needs
of specific individuals or accounts or solely through the issuance of
statistical information containing no expression of opinion as to the
investment merits of a particular security.
4. Such other characteristics that would
demonstrate that there is no need to meet the examination requirements,
e.g. substantial experience in the securities or investment
industry.
(5)
Discretion and Custody Requirements.
(a) An investment adviser registered or
required to be registered under M.G.L. c. 110A who has discretionary authority
over client funds or securities shall be bonded in an amount of not less than
$10,000.00 by a bonding company qualified to do business in the Commonwealth.
This requirement shall be waived provided the following conditions are met:
1. the investment adviser is registered in
the jurisdiction where its principal place of business is located;
and
2. the investment adviser meets
the minimum financial requirements of the jurisdiction where its principal
place of business is located.
(b) An investment adviser registered or
required to be registered under M.G.L. c. 110A who has custody of client funds
or securities shall comply with the provisions of Rule 206(4)-2 under the
Investment Advisers Act of 1940 ( 17 CFR 275.206(4)-2 ).
1.
Custody shall
have the meaning defined in Rule 206(4)-2(d)(2) under the Investment Advisers
Act of 1940 ( 17 CFR 275.206(4)-(2)(d)(2) ).
2. An adviser is not exempt from the
independent verification requirement pursuant to Rule 206(4)-2(b)(3) under the
Investment Advisers Act of 1940 unless the adviser meets the following
additional requirements:
a. The adviser has
written authorization from the client to deduct advisory fees from the account
held with the qualified custodian; and
b. The adviser sends the qualified custodian
and client an invoice or statement of the amount of the fee to be deducted from
the client's account each time a fee is directly deducted.
(c)950 CMR 12.205(5) shall be
enforced as of August 3, 2012.
(6)
Post-registration/Post-notice
Filing Requirements.
(a) An
investment adviser registered or required to be registered under M.G.L. c. 110A
shall file the following information with the Division:
1. annual and other-than-annual amendments in
compliance with the language, organizational format and the timing of filing
requirements as specified in the Instructions to Form ADV, including the
requirements for both annual and other-than-annual amendments; and
2. updates to Form U-4 or any representation
or undertaking contained in any affidavit filed with the Division if such Form
U-4 or any representation or undertaking changes in any respect.
(b) The registrant will have
complied with the requirement of prompt notification if an amendment is filed
with the Division as soon as possible, but in no event more than ten business
days after the registrant has knowledge of the circumstances requiring such
notification.
(c) Filing an
amendment to the Form U-4 of an investment adviser representative is within the
supervisory responsibilities of the investment adviser. Each investment adviser
must establish written procedures to ensure compliance with this
provision.
(d) Each investment
adviser registered or required to be registered under M.G.L. c. 110A exercising
discretionary investment authority or having custody of client funds shall file
the following as evidence of compliance with 950 CMR 12.205(5):
1. An investment adviser exercising
discretionary investment authority shall file evidence of a surety bond within
90 days from fiscal year-end.
2. An
investment adviser having custody of client funds as defined in 950 CMR
12.205(5)(b)1. shall file annually with the Division Form ADV-E in compliance
with the requirements of Rule 206(4)-2 under the Investment Advisers Act of
1940.
(e) An investment
adviser registered with the Division who subsequently becomes registered with
the U.S. Securities and Exchange Commission shall promptly notify the Division
of such registration by filing a copy of its SEC registration notice with the
Division.
(f) Within ten business
days of filing any amendment with the U.S. Securities and Exchange Commission,
a federal covered adviser shall file a copy of such amendment with the
Division.
(7)
Record Keeping Requirements.
(a) Each investment adviser shall make and
keep true, accurate and current the following accounts, correspondence,
memoranda, papers, books, and other records relating to its investment advisory
business:
1 All books and records required to
be maintained by SEC Rule 204-2 (Books and Records to Be Maintained by
Investment Advisers,
17 CFR
275.204-2 ).
2. A complaint file, containing all
correspondence between the investment adviser and its clients pertaining to any
complaint about services rendered. This file must be maintained in such a
manner:
a. To identify all complaints made
against a particular investment adviser representative employed or associated
with the investment adviser.
b. To
segregate any material within the file for which a claim of privilege is
asserted, including the justification for such assertion.
c. To describe what action was taken by the
investment adviser with respect to the complaint.
3. A litigation file documenting any criminal
or civil action or administrative proceeding filed in any state or federal
court or by any administrative agency against the investment adviser or any of
its personnel with respect to a securities or an investment advisory
transaction and the disposition of the action or proceeding.
4. A chronological correspondence file
containing, or a chronological correspondence log identifying all
correspondence disseminated to or received from clients or prospective clients
in connection with the business of the investment adviser. If a file is
maintained, it should include copies of all correspondence. If a log is
maintained, it should list the date, the name of the sender or recipient, and a
brief description of the subject matter of the correspondence.
Note: The investment adviser may elect to meet this requirement by
maintaining either a file or a log. It is not necessary that both be
maintained.
5. The name and address
of each investment advisory client.
6. Copies of the written disclosure delivered
pursuant to 950 CMR 12.205(8)(e). If the disclosure obligation is met in whole
or in part by the delivery of a prospectus, the investment adviser need only
note such delivery and not retain a copy of the prospectus in each client's
file.
(b) All items
required by 950 CMR 12.200 must be maintained in a form permitting easy access
for reasonable periodic, special, or other examinations by representatives of
the Division. Inspection may be made either in person on the premises of the
investment adviser or by written inquiry from the Division. If inspection is
made by written inquiry, the investment adviser shall produce legible and
reproducible copies of the requested records to the Division at the investment
adviser's expense. Unless otherwise stated in the written inquiry, such copies
shall be delivered to the Division within five business days after the request
is received. Copies can be either reproductions of the original or print-outs
if kept in electronic form.
(c) All
items required by 950 CMR 12.200 shall be maintained and preserved for a period
of not less than five years, the first two years in an appropriate office of
the investment adviser. All items must be arranged or indexed to permit prompt
retrieval of any particular record.
(d) All requirements of 950 CMR 12.205(7)
shall be waived provided the following conditions are met:
1. The investment adviser is registered in
the jurisdiction where it has its principal place of business
located.
2. The investment adviser
maintains its books and records in accordance with the applicable law of the
jurisdiction where it has its principal place of business.
(8)
Disclosure
Requirements.
(a) An investment
adviser must provide each client or prospective client with the following
disclosures at least 48 hours before entering into a contract, or if the
investment adviser gives the disclosures to the client at the time of entering
into the contract, the investment adviser must give the client the option to
cancel the contract within five business days:
1. A disclosure statement, which may be a
copy of Part 2 of Form ADV or another written document containing the
equivalent information. If the document is not Part 2 of Form ADV, then it must
be filed with the Division prior to its first use;
2. A stand-alone Table of Fees for Services
in a form approved by the Division and prepared pursuant to the instructions
thereto;
3. Any additional
information required to be disclosed under the Investment Advisers Act of 1940;
and
4. A notice that the
disciplinary history of the investment adviser and its representatives can be
obtained from the Division.
(b) An investment adviser annually shall,
without charge, deliver or offer in writing to deliver upon written request to
each of its advisory clients the disclosures required by 950 CMR 12.205(8)(a).
Any disclosures requested in writing by an advisory client pursuant to an offer
required hereby must be sent out within seven days of the receipt of the
request.
(c) If an investment
adviser renders substantially different types of investment advisory services
to different advisory clients, any information required by Part 2 of Form ADV
may be omitted from the statement furnished to an advisory client or
prospective advisory client if such information is applicable only to a type of
investment advisory service or fee which is not rendered or charged, or
proposed to be rendered or charged, to that client or prospective
client.
(d) The disclosure
obligations required by M.G.L. c. 110A, § 203 A(a) will be met if the
investment adviser complies with the requirements in 950 CMR
12.205(8)(a).
(e) Disclosure
obligations under M.G.L. c. 110A, § 203 A(b):
1. Before the purchase or sale of a security
with respect to which investment advice has been rendered, the investment
adviser or investment adviser representative shall disclose to each client in
Massachusetts:
a. The total amount of sales
commission or other fees, including mark-ups or mark-downs, that may reasonably
be expected to be charged or deducted in connection with the purchase or
sale.
b. That the investment
adviser or investment adviser representative will receive such amount or a
portion of such amount, or, in the case of a transaction to be effected through
a broker-dealer that is a person affiliated or under common control with the
investment adviser or investment adviser representative, that the broker-dealer
is affiliated with the adviser and will receive such amount or portion of such
amount.
Note: Any person who regularly receives a transactions-based fee for effecting transactions in securities is presumed to be in the business and thus must register as a broker-dealer or an agent of a broker-dealer.
c.
The existence of any compensation arrangement with an issuer of securities or
other third parties, including sales incentives (e.g., special
bonuses, discounts, premiums or prizes) or arrangements which bestow
soft-dollar or other such indirect benefits to the investment adviser or
investment adviser representative.
2. The disclosure required hereunder shall be
in writing if the investment advice was given in writing.
3. The disclosure required under M.G.L. c.
110A, § 203 A(b) need not be given in any of the following circumstances:
a. The investment advice is rendered pursuant
to a written agreement giving discretionary authority to the investment adviser
or investment adviser representative.
b. The investment advice pertains to a
security traded on a national exchange or through the NASDAQ Stock Market; the
commission, mark-up or mark-down is permitted under the rules of FINRA; and,
the broker-dealer effecting the transaction has no affiliation with the
investment adviser or investment adviser representative.
4. The client may waive, in writing, receipt
of the disclosure required by 950 CMR 12.205(8)(e) l. under any of the
following conditions:
a. The investment advice
pertains to an investment company registered with the Division; and the client
has previously received a prospectus for the investment company and a separate,
clear written explanation of the information required to be disclosed in 950
CMR 12.205(8)(e) l.a. through c.
b.
The investment advice pertains to a subsequent sale after the initial sale made
pursuant to an agreement to invest a certain sum of money on a periodic
basis.
(f) If
an investment adviser maintains a website available to the public or to the
investment adviser's clients, the Table of Fees for Services required by 950
CMR 12.205(8)(a)2. must be available and easily accessible on the
website.
(g) The Table of Fees for
Services required by 950 CMR 12.205(8)(a)2. must be updated on an annual basis
as of the date on which the investment adviser is required to file any annual
amendments to Form ADV.
(h)950 CMR
12.205(8) shall be enforced as of January 1, 2020.
(9)
Fraudulent
Practices/Dishonest or Unethical Practices.
(a) As used in 950 CMR 12.205(9), "adviser"
refers to any person, including persons registered or excluded from
registration under M.G.L. c. 110A, who receives any consideration from another
person primarily for advising the other person as to the value of securities or
their purchase and sale, whether through the issuance of analyses or reports or
otherwise. It is a rebuttable presumption that such term includes all
investment advisers and investment adviser representatives, as well as other
persons who charge fees based on assets under management or portfolio
performance for rendering investment advice.
(b) The following practices by an adviser
shall be deemed to operate as a fraud or deceit upon the other person under
M.G.L. c. 110A, § 102(2):
1. Any practice
proscribed under the SEC rules promulgated under the Investment Advisers Act of
1940, § 206(4) ( 17 CFR 275.206(4) -l et seq.), unless
such practice meets all conditions stated within those rules.
2. Use of a business name by an investment
adviser so similar as to be likely to be mistaken for it, to any other firm,
association or person already carrying on business in the Commonwealth, unless
the business name is the same as the personal name of one of the
principals.
(c) The
following practices are a nonexclusive list of practices by an adviser which
shall be deemed "dishonest or unethical conduct or practices in the securities
business" for purposes of M.G.L. c. 110A, § 204(a)(2)(G):
1. Recommending to a client to whom
investment supervisory, management or consulting services are provided, the
purchase, sale or exchange of any security without reasonable grounds to
believe that the recommendation is suitable for the client on the basis of
information furnished by the client after reasonable inquiry concerning the
client's overall portfolio, investment objectives, financial situation and
needs, investment experience and any other information known or acquired by the
adviser after reasonable examination of the client's records as may be provided
to the adviser.
2. Placing an order
to purchase or sell a security for the account of a client without authority to
do so.
3. Placing an order to
purchase or sell a security for the account of a client upon instruction of a
third-party without first having obtained a written third-party trading
authorization from the client.
4.
Exercising any discretionary power in placing an order for the purchase or sale
of securities without first obtaining written discretionary authority, unless
the discretionary power relates solely to the price at which, or the time when,
an order involving a definite amount of specified securities shall be executed,
or both.
5. Inducing trading in a
client's account that is excessive in size and frequency in view of the
financial resources, investment objectives and character of the
account.
6. Borrowing money or
securities from a client, unless the adviser is a broker-dealer or the client
is a broker-dealer, an affiliate of the adviser, a family member or a financial
institution engaged in the business of loaning funds or securities.
7. Loaning money to a client, unless the
adviser is a registered broker-dealer engaged in the management of margin
accounts, or a financial institution engaged in the business of loaning funds,
or the client is an affiliate of the adviser or a family member.
8. Misrepresenting to any advisory client, or
prospective advisory client, the qualifications of the adviser, its
representatives or any employees, or misrepresenting the nature of the advisory
services being offered or fees to be charged for such services, or omitting to
state a material fact necessary to make the statements made regarding
qualifications, services or fees, in light of the circumstances under which
they are made, not misleading.
9.
Providing a report or recommendation to any advisory client prepared by someone
other than the adviser without disclosing that fact. (950 CMR 12.205(9)(c)9.
does not apply to a situation where the adviser uses published research reports
or statistical analyses to render advice or where an adviser orders such a
report in the normal course of providing services.)
10. Charging a client an advisory fee that is
unreasonable in light of the fees charged by other investment advisers
providing essentially the same services.
11. Failing to disclose to a client in
writing before rendering investment advice any material conflict of interest
relating to the adviser, its representatives or any of its employees, which
could reasonably be expected to influence or impair the rendering of unbiased
and objective advice including:
a.
Compensation arrangements connected with advisory services to clients which are
in addition to compensation from such clients for such services; and
b. Charging a client an advisory fee for
rendering advice without disclosing that a commission or other remuneration for
executing securities transactions pursuant to such advice will be received by
the adviser, its representatives or its employees or that such advisory fee is
being reduced by the amount of the commission or other remuneration earned by
the adviser, its representatives or employees for the sale of securities to the
client.
12. Guaranteeing
a client that a specific result will be achieved (gain or loss) as a result of
the advice which will be rendered.
13. Disclosing the identity, affairs, or
investments of any client to any third-party, unless required by law to do so,
or unless consented to by the client.
14. Entering into, extending or renewing any
investment advisory contract, other than a contract for impersonal advisory
services, unless such contract is in writing and discloses, in substance, the
services to be provided, the term of the contract, the advisory fee or the
formula for computing the fee, the amount or the manner of calculation of the
amount of the prepaid fee to be returned in the event of contract termination
or nonperformance, whether the contract grants discretionary power to the
adviser or its representatives and that no assignment of such contract shall be
made by the adviser without the consent of the client.
15.
a.
Using a purported credential or professional designation that indicates or
implies that an investment adviser representative has special certification or
training in advising or servicing senior citizens, unless such credential or
professional designation has been accredited by an accreditation organization
recognized by the Secretary by rule or order. For the purposes of 950 CMR
12.205(9)(c)15., the term "senior citizen" shall include a person 65 years of
age or older.
b. In determining
whether a combination of words (or an acronym standing for a combination of
words) constitutes a purported credential or professional designation
indicating or implying that an investment adviser representative has special
certification or training in advising or servicing senior citizens, factors to
be considered shall include:
(i) use of one or
more words such as "senior", "retirement", "elder", or like words combined with
one or more words such as "certified", "chartered", "adviser", "specialist", or
like words in the name of the credential or professional designation;
(ii) how those words are combined;
and
(iii) whether they are
capitalized.
950 CMR 12.205(9)(c)15. is not intended to apply to job titles provided by an investment adviser specifying one's area of specialization within an organization, unless the facts and circumstances associated with the provision or use of a job title indicate that it improperly suggests or implies certification or training beyond that which the titleholder possesses or that it otherwise misleads investors. It is also not intended to apply to job titles provided by an investment adviser indicating seniority within an organization.
c.
There shall be a grace period commencing June 1, 2007 and running until two
months after the date that at least one accreditation organization is
recognized by the Secretary pursuant to 950 CMR 12.205(9)(c)15.e. In addition,
there shall be a six-month grace period with respect to any credential or
professional designation that has been submitted to an accreditation
organization described in 950 CMR 12.205(9)(c)15.a. for accreditation, running
from the date of such submission; provided, that the Secretary may, at his
discretion (consistent with the public interest and protection of investors),
increase such grace period by an additional period of up to 12 months upon a
showing of substantial progress in the accreditation process and a showing that
such additional time is needed to complete the accreditation process; however,
if accreditation of such credential has been denied in a final decision of such
accreditation organization, any grace period provided for in 950 CMR
12.205(9)(c)15.c. shall terminate on the date of such denial.
d.950 CMR 12.205(9)(c)15. shall not apply to
a degree or certificate evidencing completion of an academic program at an
accredited institution of higher education unless the facts and circumstances
associated with the provision or use of such degree or certificate indicate
that it improperly suggests or implies certification or training beyond that
which the degree holder or certificate holder possesses or that it otherwise
misleads investors.
e. The
Secretary may recognize any accreditation organization by rule or order. The
Secretary shall consider any request for recognition by an accreditation
organization. In determining whether to recognize an accreditation
organization, the Secretary shall consider, among other factors that the
Secretary deems appropriate in his or her discretion, whether or the extent to
which the accreditation organization is nationally recognized and independent,
whether it is for-profit or nonprofit, whether the primary purpose of the
organization is to develop standards and implement methods for assuring
competency and whether the organization has standards to address the status of
designees who obtained the credential or designation prior to accreditation.
The Secretary shall maintain a readily-accessible list, with contact
information, of all accreditation organizations he or she recognizes.
16.
a. To retain Investment Consulting Services,
for compensation that is provided either directly to the consultant or
indirectly through a Matching or Expert Network Service, unless the investment
adviser obtains a written certification that:
i. describes all confidentiality restrictions
relevant to the potential consultation which the consultant has, or reasonably
expects to have;
ii. affirmatively
states that the consultant will not provide any Confidential Information to the
investment adviser; and
iii. is
signed and dated by the consultant, and is accurate as of the date of the
initial, and any subsequent, consultation(s).
b. Notwithstanding 950 CMR 12.205(9)(c)
16.a., an investment adviser who comes into possession of material Confidential
Information through a consultation is precluded from trading any relevant
security until such time as the Confidential Information is made
public.
c.
Definitions. For purposes of 950 CMR 12.205(9)(c)16.:
i.
Confidential
Information means any non-public information, which one is bound
by a confidentiality agreement or fiduciary (or similar) duty not to
disclose.
ii.
Matching
or Expert Network Service means a firm that, for compensation,
matches consultants with investment advisers.
iii.
Investment Consulting
Services means a consultation for the purposes of assisting the
investment adviser's decision as to whether to buy, sell, or abstain from
buying or selling, positions in client accounts,
d.950 CMR 12.205(9)(c)16. shall be enforced
as of December 1, 2011. 17. Receiving any compensation on the basis of a share
of capital gains upon or capital appreciation of the funds or any portion of
the funds of a client, unless such compensation is received in compliance with
Rule 205-3 under the Investment Advisers Act of 1940 (
17
CFR 275.205-3
).
(10)
Supervision.
(a) Each investment adviser shall establish
and maintain a system to supervise the activities of each investment adviser
representative and other employees that is reasonably designed to achieve
compliance with M.G.L. c. 110A,
950 CMR 10.00 through
950 CMR
14.413, the Securities Act of 1933 (
15
USC §
77a ), 17 CFR Part 230; the
Securities Exchange Act of 1934 (
15
USC §
78a ); 17 CFR Part 240; the
Investment Company Act of 1940 (
15 USC §
80a-1 ); 17 CFR Part 270; and the Investment
Advisers Act of 1940 (
15 USC
§
80b-1 ) under 17 CFR Part 275. Final
responsibility for proper supervision shall rest with the investment adviser.
This supervisory system shall provide, at a minimum, for the following:
1. The establishment and maintenance of
written procedures as required in 950 CMR 12.205(10)(a).
2. The designation of an appropriately
registered officer or partner with authority to carry out the supervisory
responsibilities of the investment adviser for each type of business in which
it engages for which registration as an investment adviser is
required.
3. The designation of an
appropriately registered investment adviser representative in each office where
the investment adviser does business in the Commonwealth with authority to
carry out the supervisory responsibilities assigned to that office by the
investment adviser.
4. The
assignment of each registered investment adviser representative to an
appropriately registered investment adviser representative who shall be
responsible for supervising that person's activities.
5. Reasonable efforts to determine that all
supervisory personnel are qualified by virtue of experience or training to
carry out their assigned responsibilities.
6. The participation of each registered
investment adviser representative, either individually or collectively, no less
than annually, in an interview or meeting conducted by persons designated by
the investment adviser at which compliance matters relevant to the activities
of the investment adviser representatives are discussed. Such interview or
meeting may occur in conjunction with the discussion of other matters and may
be conducted at a central or regional location or at the representative's place
of business.
(b)
Establishment of Written Procedures.
1. Each investment adviser shall establish,
maintain, and enforce written procedures to supervise the types of business in
which it engages and to supervise the activities of its investment adviser
representatives and other employees that are reasonably designed to achieve
compliance with applicable state and federal securities laws and
regulations.
2. The investment
adviser's written supervisory procedures shall set forth the supervisory system
established by the investment adviser pursuant to 950 CMR 12.205(10)(a), and
shall include the titles, registration status and locations of the required
supervisory personnel and the responsibilities of each supervisory person as
these relate to the types of business engaged in, and applicable state and
federal securities laws and regulations. The investment adviser shall maintain
on an internal record the names of all persons who are designated as
supervisory personnel and the dates for which such designation is or was
effective.
3. A copy of an
investment adviser's written supervisory procedures, or the relevant portions
thereof, shall be kept at each location where activities are conducted on
behalf of the investment advisers with persons located in the Commonwealth. The
written supervisory procedures shall be amended to reflect any change in state
and federal securities laws and regulations.
(c) Each
investment adviser shall conduct a review, at least annually or more often if
circumstances warrant, to determine that it is in compliance with the written
supervisory procedures. A record of such review shall be maintained by the
investment adviser for five years after the review is conducted.
(d) Each investment adviser shall establish
procedures for review and endorsement by supervisory personnel in writing, on
an internal record, of all transactions and all correspondence of its
investment adviser representatives pertaining to the rendering of investment
advice to individual clients.
(e)
Each investment adviser shall have the responsibility and duty to ascertain by
investigation the good character, business repute, qualifications, and
experience of any person prior to making a certification in the application of
such person for registration. Where an applicant for registration has
previously been registered, the investment adviser shall obtain from the
applicant a copy of the Uniform Termination Notice of Securities Industry
Registration (Form U-5) filed with the Division by such person's most recent
investment adviser employer. The investment adviser shall obtain the Form U-5
as required by 950 CMR 12.205 no later than 60 days following the filing of the
application. An investment adviser receiving a Form U-5 pursuant to 950 CMR
12.205 shall review the Form U-5 and any amendments thereto and shall take such
action as may be deemed appropriate.
(f) Any applicant for registration who
receives a request for a copy of his or her Form U-5 from an investment adviser
pursuant to 950 CMR 12.205 shall provide such copy to the investment adviser
within two business days from the request if the Form U-5 has been provided to
such person by his or her former employer. If a former employer has failed to
provide the Form U-5 to the applicant for registration, such person shall
promptly request the Form U-5, and shall provide it to the requesting
investment adviser within two business days of receipt thereof. The applicant
shall promptly provide any subsequent amendments to a Form U-5 he or she
receives to the requesting investment adviser.
Notes
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No prior version found.