STATEMENT OF BASIS AND PURPOSE

Promulgation of Amendments to Division Rules  

Colorado Division of Securities
September 15, 2010

Pursuant to the authority found in the Colorado Securities Act (“Act”), sections 11-51-101, et seq., C.R.S. (2010), including part 6 of the Act, the Securities Commissioner adopts amendments to Division Rules 51-2.1, 51-3.9, 51-3.10, 51-4.1, 51-4.3, 51-4.4, 51-4.1(IA), 51-4.3(IA), 51-4.4(IA), 51-4.5(IA), 51-4.6(IA), 51-4.8(IA), 51-4.10(IA), and 51-7.1 on October 8, 2010.

The general purpose of the following amendments is to have the rules accurately reflect changes that have occurred.  In the definitional section of the rules, the actual addresses for “CRD” and “IARD” have changed, so the amendments to Rule 51-2.1.B and L delete the inaccurate addresses.  The National Association of Securities Dealers, “NASD”, changed its name to the Financial Industry Regulatory Authority, or “FINRA.”  Amendments have been made throughout the rules to reflect this change.  The amendments to Rule 51-3.9 reflects Moody’s name change to Mergent.  The amendment to Rule 51-4.3.G, which changes the time period from five years to two years for successfully completing examinations to fulfill the application requirements reflects the current industry wide standard and brings Colorado in conformity with this standard.  The addition of the phrase “if any” to Rule 51-4.1(IA).C clarifies that payment of fees is not always necessary under certain conditions.  The amendment to Rule 51-4.6(IA).A.15 requires the solicitor’s disclosure statement to be in compliance with not only the federal requirement, but also the state requirements for such disclosure statements.  The amendment to Rule 51-4.8(IA).R adds investment adviser representatives to the prohibition of investment advisers from entering into advisory contracts that are contrary to Section 205 of the Investment Advisers Act of 1940.  This prohibition should logically include representatives and closes a loop hole that exists under this rule.  

The general purpose of amending Rule 51-4.4, Withdrawal of a Sales Representative License as to broker-dealers and securities sales representatives, and Rule 51-4.5(IA), Withdrawal of an Investment Adviser or Investment Adviser Representative License as to investment advisers and investment adviser representatives, is to adopt a rule which allows the Securities Commissioner to order an application deemed abandoned when the applicant fails to adequately respond to any request for additional information required under § 11-51-403 of the Act.  The amendments provide the Securities Commissioner a means to bring closure to the application process for license applicants who ignore requests from the staff of the Division of Securities (“Staff”) for additional and material information about the applicant which is necessary in order for the Staff to approve or deny their license application. 

After review of the record regarding the proposed amendments to Rule 51-4.9(IA), Payment of Cash Fees for Solicitation as to investment advisers and investment adviser representatives, the proposed amendments have been withdrawn at this time. 

The general purpose of amending Rule 51-4.1(IA), Electronic Filing With Designated Entity as to investment advisers and investment adviser representatives, is to eliminate unnecessary language from the rule that is likely to lead to confusion and misunderstanding. When Rule 51-4.1(IA) was first drafted the IARD electronic registration database was being integrated for use by the Division of Securities. At that time resubmission of Form ADV (Uniform Application for Investment Adviser Registration) and Form U-4 (Uniform Application for Securities Industry Registration or Transfer) was required from all investment advisers so that these forms could be included in the IARD electronic database. Currently, these applications are only available electronically, thus eliminating the need for the rules.

The general purpose of amending Rule 51-4.3(IA), Application For Investment Adviser Representative Registration (Licensure) as to investment advisers and investment adviser representatives, is to add a provision which would require investment advisers to file an Updated Amendment of Form ADV within 90 days of the end of their fiscal year. The amendment requires that all registered investment advisers annually update their Form ADV in order to maintain accurate records.  The amendments address a need to place a reasonable time constraint on filing updated ADV forms in order to encourage prompt action by investment advisers. Such information is available to the public and only timely disclosure can possibly be in the investing public’s best interests.  In addition, the proposed amendments delete the designations of Certified Investment Management Consultant and Certified Investment Management Analyst as alternatives to the examination requirements in order to conform to the national application form. 

The general purpose of amending Rule 51-4.6(IA), Books and Records Requirements for Licensed Investment Advisers as to investment advisers and investment adviser representatives, is to conform our rule to the custody requirements found in the North American Securities Administrators Association’s model rule on recordkeeping requirements. The amendment to these rules would require investment advisers to follow stricter rules with regard to record keeping in three situations: (1) Where the adviser inadvertently held or obtained a client’s securities or funds and returned them to the client within three business days, (2) where the adviser has forwarded third party checks within 24 hours, or (3) where the adviser obtains possession of securities that are acquired from the issuer in a transaction or chain of transactions not involving any public offering that comply with concurrent exemptions.  The amendments tighten the custody requirements on investment advisers. The record keeping requirements in the above three areas, will provide an added umbrella of protection of record requirements to an area which previously had been left unregulated. Proper recordkeeping effectively safeguards against potential fraud and misrepresentation. 

The general purpose of amending Rule 51-4.8(IA), Dishonest and Unethical Conduct as to investment advisers and investment adviser representatives, is to add in additional language which clarify the custody requirements with regard to investment advisers and investment adviser representatives found in § 11-51-407(5), C.R.S. Specifically, the amendment outlines three instances in which the custody requirements in § 11-51-407(5), C.R.S. do not apply. The amendments also clarify the language found in Rule 51-4.8(IA)(V) regarding certain certifications. 

The Securities Commissioner finds that the adoption of these amendments to the Rules is necessary and appropriate in the public interest, and is consistent with the purposes and provisions of the Act.  The Securities Commissioner further finds that the record demonstrates the need for the rules; the rules are clearly and simply stated; proper statutory authority exists for the rules; the rules do not conflict with any other rules or statutes governing the Division of Securities; and the rules are coordinated with the federal acts and statutes and the rules and regulations promulgated thereunder to which references are made, to the extent coordination with them is consistent with the purposes and provisions of the Act.

This general statement of basis and purpose is incorporated by reference in the rules adopted by the Securities Commissioner on October 8, 2010.  The rules becomes effective on December 1, 2010.

DATED this ___ day of October, 2010.

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Fred J. Joseph
Securities Commissioner