| Securities and Business Investments Division | |
|
Securities Bulletin | |
| Vol. XXV No. 2 |
Summer 2011 |
Features
- State Registration Timetable Set for Certain Investment Advisers Affected by Dodd-Frank
- Order Governing Certain Federally Exempt Investment Advisers Post Dodd-Frank
- "Client" Definition Updated for Purposes of State De Minimis Exemption
- Quarterly Statistical Summaries
Cynthia Antanaitis, Assistant Director and Bulletin Editor
Eric Wilder, Assistant Director
Julius Blackwelder d/b/a Friend’s Investment Group – Order to Cease and Desist, Order to Make Restitution and Notice of Intent to Fine Issued Following Allegations of Fraudulent Note Sales
On June 30, 2011, the Banking Commissioner issued an Order to Cease and Desist, Order to Make Restitution, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CRF-11-7806-S) against Julius Blackwelder d/b/a Friend’s Investment Group of 1310 Jeff Davis Drive, Tyler, Texas 75703-5542.
The action alleged that from at least 2001 forward, respondent Blackwelder sold several unregistered promissory notes in violation of the Connecticut Uniform Securities Act, and represented to certain investors that he would manage and invest their funds to achieve a guaranteed return of 20 percent and 25 percent. The action also alleged that respondent Blackwelder engaged in fraudulent, dishonest or unethical practices by failing to disclose to investors that respondent Blackwelder would use investor funds to pay for his personal and household expenses; that investors might lose their entire investment; any risk factors related to the investment; any financial information on respondent Blackwelder; information substantiating how the represented rates of return could be achieved; and information on respondent Blackwelder’s ability to meet his obligations under the notes.
The action directed respondent Blackwelder to cease and desist from regulatory violations and to make restitution of those sums obtained in violation of Sections 36b-4(a) and 36b-4(b) of the Act. Respondent Blackwelder was afforded an opportunity to request a hearing on the Order to Cease and Desist, Order to Make Restitution and Notice of Intent to Fine.
Gregory James Buchholz (CRD # 1864780) – Agent Registration Revoked
On June 27, 2011, the Banking Commissioner entered an Order (Docket No. NR-11-7857-S) revoking the agent registration of Gregory James Buchholz, a former broker-dealer agent of Raymond James Financial Services, Inc. (CRD number 6694). Although the Respondent’s agent registration had been withdrawn, Connecticut law permits the Commissioner to initiate revocation proceedings within one year after a withdrawal becomes effective. The revocation action had been preceded by a May 11, 2011 Notice of Intent to Revoke Registration as an Agent and Notice of Right to Hearing (Docket No. NR-11-7857-S) alleging that 1) on November 12, 2010, the Respondent pled guilty to a single-count information for felony wire fraud in violation of 18 U.S.C. §1343 (United States of America v. Gregory Buchholz, D. Conn., Case No. 3:10-CR-229 (JCH)); and 2) on January 31, 2011, the Respondent was sentenced to 48 months in prison, followed by three years of supervised release, and ordered to pay over $1.7 million in restitution to Raymond James Financial Services, Inc. The felony conviction would support the revocation of the Respondent’s agent registration in Connecticut.
In revoking respondent Buchholz’s agent registration, the Commissioner adopted as findings the factual statements and legal basis set forth in the May 11, 2011 Notice of Intent to Revoke Registration as an Agent. Respondent Buchholz did not appear or contest the revocation of his agent registration.
Phil Eckstein (CRD # 3080212) – Agent Registration Denied
On June 24, 2011, the Banking Commissioner entered an Order denying the agent registration of Phil Eckstein of Wilton, Connecticut (Docket No. ND-11-7870-S). Respondent Eckstein had sought registration as a broker-dealer agent of Park Avenue Securities LLC. Although that application was withdrawn, Connecticut laws permits the Commissioner to initiate denial proceedings within one year after a withdrawal becomes effective. The denial order had been preceded by an April 20, 2011 Notice of Intent to Deny Registration as an Agent and Notice of Right to Hearing (Docket No. ND-11-7870-S) alleging that respondent Eckstein had been the subject of a February 8, 2011 Complaint, Stipulation and Final Order (Docket No. FC 10-70) by the State of Connecticut Insurance Department. The February 8, 2011 Insurance Department action superseded an earlier Insurance Department Order dated July 26, 2010. The Insurance Department action fined respondent Eckstein $8,000 and placed his insurance licenses on a probationary status for one year following allegations that 1) respondent Eckstein sold a non-existent annuity to a customer; and 2) an investigation by respondent Eckstein’s former employer concluded that the respondent deposited the customer’s funds into respondent Eckstein’s own bank account rather than applying them to an annuity purchase. Under the Connecticut Uniform Securities Act, a sanction issued by a state financial services regulator based upon nonsecurities violations of state law under which a business involving insurance is regulated would support proceedings to deny a broker-dealer agent registration.
In denying respondent Eckstein’s agent registration, the Commissioner adopted as findings the factual statements and legal basis set forth in the April 20, 2011 Notice of Intent to Deny Registration as an Agent. Respondent Eckstein did not appear or contest the denial of his agent registration.
Wadsworth Investment Co., Inc. (CRD # 5844), Portfolio Timing Service d/b/a PTS Asset Management (CRD # 111047), William F. Wadsworth (CRD # 456251) and William F. Wadsworth, Jr. (CRD # 1987068) – Amended and Restated Order to Cease and Desist, Notice of Intent to Revoke Registration as a Broker-dealer, Notice of Intent to Revoke Registration as a Broker-dealer Agent, Notice of Intent to Revoke Registration as an Investment Adviser Agent and Notice of Intent to Fine Issued
On June 1, 2011, the Banking Commissioner issued an Amended and Restated Order to Cease and Desist and Notice of Intent to Fine (Docket No. CFNR-10-7779-S) against Wadsworth Investment Co., Inc., a registered broker-dealer located at 879 Church Street, Route 68, Wallingford, Connecticut; Portfolio Timing Service d/b/a PTS Asset Management, an SEC-registered investment adviser sharing the same address as Wadsworth Investment Co., Inc.; William F. Wadsworth, a control person of both Wadsworth Investment Co., Inc. and Portfolio Timing Service; and William F. Wadsworth, Jr., the national sales manager for Portfolio Timing Service. Also on June 1, 2011, the Banking Commissioner issued an Amended and Restated Notice of Intent to Revoke the registration of Wadsworth Investment Co., Inc. as a broker-dealer in Connecticut; the registrations of William F. Wadsworth as a broker-dealer agent and investment adviser agent; and the registration of William F. Wadsworth, Jr. as a broker-dealer agent. Similar relief had been sought by the agency in an August 11, 2010 action against the respondents. An administrative hearing relating to that action is pending.
As amended, the June 1, 2011 action alleged that all of the respondents engaged in fraudulent, dishonest or unethical practices by using or permitting the use of pre-signed blank client forms; calling or allowing other employees to call mutual funds and use false identities to gain client information that otherwise would have been denied to them; and posing or permitting others to pose as clients to obtain access to a third party mutual fund’s online client accounts.
The amended action also alleged that the respondents, with the exception of William F. Wadsworth, Jr., made misrepresentations to investors to induce them to switch from one mutual fund family to another. The respondents allegedly failed to mention that investors would incur substantial fees to make the switch; that the original fund had taken steps to terminate its agreement with Wadsworth Investment Co., Inc. and Portfolio Timing Service; and that William F. Wadsworth and his family would not be paying any fees to make the switch.
In addition, the amended action alleged that Wadsworth Investment Co., Inc. 1) wilfully violated Section 36b-14(a) of the Connecticut Uniform Securities Act and Section 36b-31-14a of the Regulations thereunder by failing to maintain complete and accurate books and records and make those records available to the Commissioner; 2) wilfully violated Section 36b-14(d) of the Act and Section 36b-31-14f of the Regulations by failing to make required books and records available to the department upon its request; 3) wilfully violated Section 36b-31-6f of the Regulations by failing to enforce and maintain adequate supervisory procedures; 4) wilfully violated Section 36b-31-14e(a) of the Regulations by failing to notify the Commissioner of ownership changes affecting its business; and 5) wilfully violated Section 36b-31-15e of the Regulations by permitting an unregistered individual to serve as its Chief Compliance Officer.
The amended action also alleged that 1) respondents William F. Wadsworth and William F. Wadsworth, Jr. violated Section 36b-23 of the Act by making materially false or misleading statements in a department investigation; 2) respondent Portfolio Timing Service violated Section 36b-23 of the Act by denying that it maintained custody of client funds when that was not the case; and 3) respondents Wadsworth Investment Co., Inc., Portfolio Timing Service and William F. Wadsworth violated Section 36b-16 of the Act by selling unregistered securities of DECA ONE.
The respondents were afforded an opportunity to request a hearing on the amended and restated allegations.
Newbridge Securities Corporation (CRD # 104065) – Order to Cease and Desist, Order to Make Restitution, Notice of Intent to Revoke Registration as a Broker-dealer and Notice of Intent to Fine Issued Following Allegations of Inadequate Fee Disclosure
On April 15, 2011, the Banking Commissioner issued an Order to Cease and Desist and an Order to Make Restitution (Docket No. RCF-11-7794-S) against Newbridge Securities Corporation, a Connecticut-registered broker-dealer having its main office at 1451 Cypress Creek Road, Suite 204, Fort Lauderdale, Florida. On the same day, the Commissioner issued a Notice of Intent to Revoke Registration as a Broker-dealer and Notice of Intent to Fine with respect to the firm. The action alleged that Newbridge Securities Corporation charged its customers a transactional “Handling Fee” that was unrelated to actual transaction costs, and that the firm failed to inform customers that the fee included a profit to the firm, that certain customers paid lower fees and that the fee was not based on the actual cost of handling a particular transaction. Such conduct allegedly violated the antifraud provisions in Section 36b-4(a) of the Connecticut Uniform Securities Act and constituted a dishonest and unethical practice.
The action directed the firm to cease and desist from regulatory violations and to reimburse affected Connecticut customers the difference between the transactional “Handling Fee” each customer paid and the actual amount of the firm’s ticket, clearing and postage costs. The firm was afforded an opportunity to request a hearing on the Order to Cease and Desist, Order to Make Restitution, Notice of Intent to Revoke Registration as a Broker-dealer and Notice of Intent to Fine.
Shelly A. Richard Fined $100,000 for Selling Unregistered Securities, Transacting Business as an Unregistered Agent of Issuer and Violating State Antifraud Provisions
On April 1, 2011, the Banking Commissioner entered an Order Imposing Fine (Docket No. CF-2010-7740-S) against Shelly A. Richard of 98 Waverly Street, Cheshire, Connecticut; 745 Main Street Newington, Connecticut; and 1128 Royal Palm Beach Boulevard, Suite 145, Royal Palm Beach, Florida. The Order Imposing Fine had been preceded by a January 19, 2011 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing against co-respondents Shelly A. Richard and Cynergy Advance Services, LLC. The January 19, 2011 action had alleged that in 2008, respondent Richard, acting on behalf of Cynergy Advance Services, LLC, sold unregistered securities of Cynergy Advance Services, LLC from Connecticut, promising a 10% annual return. The January 19, 2011 action had also alleged that 1) the respondents failed to pay investors any principal or interest on the securities, and 2) that the respondents did not apprise investors of the investment risks involved or provide information on Cynergy Advance Service, LLC or the company’s ability to meet its obligations in connection with the securities offered. The action had further alleged that the respondents’ conduct violated the antifraud provisions in Section 36b-4(a) of the Connecticut Uniform Securities Act; and that respondent Richard transacted business as an unregistered agent of issuer in violation of Section 36b-6 of the Act. The Order to Cease and Desist, being uncontested, had become permanent as to respondent Shelly A. Richard on March 23, 2011.
In fining respondent Richard $100,000, the Commissioner found that respondent Richard violated Sections 36b-16, 36b-4(a) and 36b-6(a) of the Connecticut Uniform Securities Act. Shelly A. Richard did not appear or contest the imposition of the fine.
Mortgage and Credit Solutions, LLC (CRD # 81414) and Sean Patrick Moriarty (CRD # 11024703) Barred from Selling Business Opportunities in Connecticut for Seven Years; Cease and Desist Order Made Permanent
On June 22, 2011, the Banking Commissioner entered a Consent Order (Docket No. CF-2010-870-B) with respect to Mortgage and Credit Solutions, LLC of 155 North College Avenue, Suite 220, Fort Collins, Colorado, and Sean Patrick Moriarty, its sole owner and managing member. The action had been preceded by a January 11, 2011 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2010-870-B) alleging that, from at least June 2008 forward, the respondents offered and sold unregistered business opportunities to Connecticut purchaser-investors in violation of the Connecticut Business Opportunity Investment Act. The business opportunity in question would enable purchasers to start a mortgage and credit counseling business. In addition, the January 11, 2011 action had alleged that the respondents represented that they would provide marketing support to purchaser-investors as well as an income guarantee. The Consent Order acknowledged that the respondents had submitted evidence demonstrating economic hardship such that they were incapable of paying any fine that otherwise would have been assessed against them.
The Consent Order rendered the Order to Cease and Desist permanent as of June 22, 2011, and barred the respondents from selling business opportunities in or from Connecticut for seven years. The Consent Order also directed the respondents to retain legal counsel following the expiration of the seven year bar if the respondents planned to offer or sell business opportunities in or from Connecticut at that time.
Meyers Associates, L.P. (CRD # 34171) Fined $12,500 for Inadequate Disclosure of “Postage and Handling” Fees, Alleged Registration Violations
On June 14, 2011, the Banking Commissioner entered a Consent Order (Docket No. RCF-10-7817-S) with respect to Meyers Associates, L.P., a Connecticut-registered broker-dealer located at 45 Broadway, Second Floor, New York, New York. The firm had been the subject of a November 23, 2010 Order to Cease and Desist, Notice of Intent to Revoke Registration as Broker-dealer and Notice of Intent to Fine (Docket No. RCF-10-7817-S) alleging that Meyers Associates, L.P. violated Section 36b-6(b) of the Connecticut Uniform Securities Act by employing unregistered agents; and that the firm sold unregistered securities in contravention of Section 36b-16 of the Act. The November 23, 2010 action had also alleged that 1) the firm engaged in fraudulent, dishonest and unethical conduct by failing to disclose to Connecticut customers that a “handling fee” charged by the firm included a profit to the firm, that certain customers paid lower fees and that the fee was not based on the costs of handling a particular transaction; and 2) the firm failed to exercise adequate supervisory controls over its operations.
In resolution of the matter, the Consent Order fined the firm $12,500, and directed the firm to cease and desist from regulatory violations. In addition, the Consent Order required that the firm 1) reimburse affected Connecticut customers the difference between the per transaction “Handling Fee” paid by the customer and the actual amount of the firm’s ticket and clearing charge and the postage fee assessed by the firm’s clearing firm; 2) retain an independent consultant to review the firm’s operations and make compliance recommendations; and 3) reimburse the department up to $3,500 to cover the cost of one or more examinations to be conducted by the Division within twelve months following the entry of the Consent Order.
Spear Capital Management, Inc. (CRD # 114364) Fined $5,000 for Unsuitable Recommendations, Excessive Trading in Risky Exchange Traded Funds
On June 14, 2011, the Banking Commissioner entered a Consent Order (No. CO-11-7756-S) with respect to Spear Capital Management, Inc. of 45 Wintonbury Avenue, Bloomfield, Connecticut. The firm had been registered as an investment adviser under the Connecticut Uniform Securities Act until December 31, 2010 when the registration was not renewed. The Consent Order alleged that the firm engaged in dishonest or unethical practices in the securities business by 1) making recommendations concerning the purchase and/or sale of risky and speculative Exchange Traded Funds (“ETFs”) without reasonable grounds to believe the recommendations were suitable for affected clients; and 2) inducing trading in risky and speculative ETFs that was excessive in size or frequency given the financial resources, investment objectives and character of affected client accounts. In addition, the Consent Order alleged that the firm failed to establish, enforce and maintain a system for supervising the activities of its investment adviser agents and Connecticut office operations that was reasonably designed to achieve compliance with applicable securities laws and regulations.
The Consent Order fined the firm $5,000 and directed it to cease and desist from regulatory violations.
ACAE, L.L.C., Michael George Sean Kondracki (CRD # 2179786) and Judy Bao-Shan Liu (CRD # 1702583) Barred from Transacting Securities Business in Connecticut for Three Years
On June 14, 2011, the Banking Commissioner issued a Consent Order (Docket No. CF-10-7334-S) with respect to ACAE, L.L.C., Michael George Sean Kondracki and Judy Bao-Shan Liu, all of 535 Hunting Ridge Road, Stamford, Connecticut. Respondents Kondracki and Liu were the owners and managers of ACAE, L.L.C. Respondents Kondracki and Liu were also the sole directors of Asset Consulting, Allocation and Evaluation Offshore Fund of Funds, Ltd., an entity based in the Cayman Islands. The Consent Order resolved allegations in a November 9, 2010 Order to Cease and Desist and Notice of Intent to Fine against the respondents and a November 9, 2010 Notice of Intent to Revoke Registration as Investment Adviser Agent with respect to Michael Kondracki.
The November 9, 2010 action had alleged that Respondents rendered investment advice from Connecticut to the Cayman Islands fund and its investors at a time when ACAE, L.L.C. was not registered as an investment adviser under the Act and while Respondents Kondracki and Liu were not registered as investment adviser agents of ACAE, L.L.C. in Connecticut.
The action had also alleged that respondents Kondracki and Liu failed to initially honor a redemption request by a widowed investor in the Cayman Islands fund, instead offering the investor alternative investments managed by Kondracki and Liu. When the investment was ultimately redeemed, it purportedly was at a reduced rate and did not include earned interest that Respondents Kondracki and Liu retained, claiming that the investor had not asked them to return those monies. The action had also stated that no legitimate accounting of the Cayman Islands fund’s holdings and expenses had been provided to the investor, and that the Respondents’ conduct involved fraudulent, dishonest or unethical practices within the meaning of Section 36b-5 of the Connecticut Uniform Securities Act.
The Consent Order directed the Respondents to cease and desist from regulatory violations, and barred them for three years from transacting business in or from Connecticut as a broker-dealer, agent, investment adviser or investment adviser agent and from soliciting or accepting funds for investment purposes from public or private investors in or from the state. In addition, the Consent Order required that, for two years following expiration of the bar, respondents Kondracki and Liu and any entity under their control retain experienced securities legal counsel to advise them on compliance with state securities laws. The Consent Order also required that, for two years following expiration of the bar, Respondents refrain from offering or selling securities in Connecticut unless the offers and sales were effected through a registered broker-dealer.
Charles Morgan Securities, Inc. (CRD # 138887) Fined $15,000 for Failing to Comply With Prior Consent Order
On May 5, 2011, the Banking Commissioner entered a Consent Order (No. CO-10-7885-S) with respect to Charles Morgan Securities, Inc., a Connecticut-registered broker-dealer located at 120 Wall Street, 16th Floor, New York, New York. The Consent Order alleged that the firm violated a June 12, 2007 Consent Order Conditioning Registration as a Broker-dealer (No. CO-07-7344-S) by selling a Rule 506 private placement absent compliance with state filing requirements. The conduct, which allegedly violated Section 36b-16 of the Connecticut Uniform Securities Act, occurred between October 2008 and March 2010. The Consent Order also alleged that the firm failed to establish, enforce and maintain a system for supervising the activities of its agents that was reasonably designed to achieve compliance with securities laws and regulations.
The Consent Order directed the firm to cease and desist from regulatory violations and to pay a $15,000 fine to the department. In addition, the Consent Order required that the firm reimburse the agency up to $3,500 to cover the costs associated with one or more examinations of the firm’s offices to be conducted within 24 months.
Aviv Michael Hen (CRD # 2927545) – Securities Activity Restrictions Imposed
On April 19, 2011, the Banking Commissioner entered a Consent Order (No. CO-11-7712-S) with respect to Aviv Michael Hen, a registered broker-dealer agent of J.H. Darbie & Co., Inc. Aviv Hen was previously registered as a broker-dealer agent of Andrew Garrett Inc. in Connecticut. The Consent Order alleged that, from at least January 2009 and while employed as a broker-dealer agent of Andrew Garrett Inc., Aviv Hen engaged in dishonest or unethical practices in the securities business within the meaning of Sections 36b-15(a)(2)(H) and 36b-4(b) of the Connecticut Uniform Securities Act. Specifically, Aviv Hen allegedly failed to fulfill the requirements in NASD Rule 2510(d) by executing transactions for a Connecticut client utilizing time and price discretion that had been granted to him a day or several days prior to the execution of the transactions.
The Consent Order prohibited Aviv Hen for three years from 1) effecting Connecticut sales, except for liquidating sales, of securities trading on the NASDAQ Bulletin Board or listed for quotation on the Pink Sheets; 2) opening new Connecticut accounts approved for options trading unless the Connecticut customer was an “accredited investor” as defined in Rule 501(a) of Regulation D under the Securities Act of 1933; 3) opening new Connecticut margin accounts unless the Connecticut customer was an “accredited investor” as defined in Rule 501(a) of Regulation D; and 4) opening or maintaining any discretionary accounts for Connecticut clients.
Merrill Lynch, Pierce, Fenner & Smith Incorporated (CRD # 7691) Assessed $359,100 for Inadequate Supervisory Controls Over Unregistered Agent Activity
On April 6, 2011, the Banking Commissioner entered a Consent Order (No. CO-10-7902-S) with respect to Merrill Lynch Pierce, Fenner & Smith Incorporated, a Connecticut-registered broker-dealer having its principal office at One Bryant Park, New York, New York. The Consent Order was an outgrowth of a multistate investigation into the firm’s registration of its Client Associates and its related supervisory controls over those individuals. The Consent Order found that, in permitting unregistered personnel to sell securities in Connecticut, the firm violated Section 36b-6(b) of the Connecticut Uniform Securities Act and Section 36b-31-6f(b) of the Regulations thereunder. In furtherance of its desire to resolve the matter informally with the department, the firm represented that it would 1) maintain a trade monitoring system to prevent the entry of client orders originating from jurisdictions where the person accepting the order was not appropriately registered; and 2) file a report with the Commissioner describing the firm’s improvements in its ability to monitor the identity and registration status of each person accepting a client order entered on the firm’s trading system.
The Consent Order directed the firm to cease and desist from regulatory violations and to remit $359,100 to the department as a fine and reimbursement for past due agent registration fees.
WHEREAS, the Banking Commissioner (the “Commissioner”) is charged with the administration of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act (the “Act”) and Sections 36b-31-2 et seq. of the Regulations of Connecticut State Agencies (the “Regulations”) promulgated under the Act;
WHEREAS, in Release No. IA-3221 (Rules Implementing Amendments to the Investment Advisers Act of 1940; June 22, 2011) (the “Implementing Release”), the SEC announced that it had adopted final rules and rule amendments under the Advisers Act, including the following:
| a) |
Rule 203A-5(a) exempting Mid-sized Advisers registered with the SEC on July 21, 2011 from the prohibition on SEC registration contained in Section 203A(a)(2) of the Advisers Act on a temporary basis. The exemption would run until January 1, 2012. Consequently, Mid-sized Advisers registered with the SEC on July 21, 2011 would remain federally registered for the duration of 2011, notwithstanding Dodd-Frank’s July 21, 2011 effective date; |
| b) |
Rule 203A-5(b) requiring all investment advisers registered with the SEC on January 1, 2012 to amend their Form ADV no later than March 30, 2012 to reflect their assets under management as of a date within 90 days prior to the filing of such amended Form ADV; |
| c) | Rule 203A-5(c)(1) requiring Mid-sized Advisers registered with the SEC on January 1, 2012 (and who were not otherwise exempt from the prohibition on SEC registration in Section 203A(a)(2) of the Advisers Act by virtue of Rule 203A-2) to withdraw their SEC registration no later than June 28, 2012. The Implementing Release explained that Rule 203A-5 provided “an additional 90 days (i.e., by June 28, 2012) for an adviser no longer eligible for Commission registration to register with the states and withdraw its registration with [the SEC]”; and |
| d) | Rule 203A-1(a)(1) permitting, but not requiring, Mid-sized Advisers to register with the SEC if they had assets under management of at least $100 million but less than $110 million, and providing that Mid-sized Advisers electing to register with the SEC under Rule 203A-1(a)(1) need not withdraw their federal registration unless they had less than $90 million in assets under management; |
WHEREAS, effective July 21, 2011, Dodd-Frank also repealed the exemption in Section 203(b)(3) of the Advisers Act for any investment adviser who during the course of the preceding twelve months had fewer than fifteen clients and who neither held itself out generally to the public as an investment adviser nor acted as an investment adviser to a federally registered investment company or a business development company;
WHEREAS, as a result of the repeal of the private adviser exemption in Section 203(b)(3) of the Advisers Act, certain private advisers that would not qualify for federal exemptive treatment post-Dodd-Frank and who were not excepted from the definition of “investment adviser” in Section 202(a)(11) of the Advisers Act would be required to register with the SEC on July 21, 2011 (and file a notice with affected states), or, if their assets under management were less than $100 million (and they were not otherwise permitted or required to register with the SEC), to register with one or more states;
WHEREAS, in the Implementing Release, the SEC announced that it had adopted Rule 203-1(e) under the Advisers Act. Rule 203-1(e) provided that investment advisers exempt from SEC registration on July 20, 2011 in reliance on Section 203(b)(3) of the Advisers Act, as it existed prior to its repeal by Dodd-Frank, would remain exempt from federal registration until March 30, 2012 provided that the affected investment adviser 1) had fewer than fifteen clients during the course of the preceding twelve months; and 2) neither held itself out generally to the public as an investment adviser nor acted as an investment adviser to any investment company registered under the Company Act or a company that had elected to be a business development company under Section 54 of the Company Act and had not withdrawn its election. After March 30, 2012, such investment advisers would be required to register with the SEC absent another exemption from federal registration;
WHEREAS, Section 36b-31(c) of the Act provides, in part, that: “To encourage uniform interpretation and administration of sections 36b-2 to 36b-34, inclusive, and effective securities regulation and enforcement, the commissioner may cooperate with . . . the Securities and Exchange Commission . . . .”
WHEREAS, Section 36b-7(b) of the Act provides, in part, that: “The commissioner may, by . . . order, waive, in whole or in part, specific requirements in connection with registration as are in the public interest and for the protection of investors”;
WHEREAS, Section 36b-31 of the Act provides, in part, that: “(a) The commissioner may from time to time make, amend and rescind such . . . orders as are necessary to carry out the provisions of sections 36b-2 to 36b-34, inclusive, including . . . orders governing registration statements, notice filings, applications, and reports, and defining any terms, whether or not used in said sections, insofar as the definitions are not inconsistent with the provisions of said sections. For the purpose of . . . orders, the commissioner may classify securities, persons and matters within his or her jurisdiction, and prescribe different requirements for different classes. (b) No . . . order may be made, amended or rescinded unless the commissioner finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 36b-34, inclusive. In prescribing . . . orders, the commissioner may cooperate with the . . . Securities and Exchange Commission with a view to effectuating the policy of said sections to achieve maximum uniformity in the form and content of registration statements, notice filings, applications and reports wherever practicable”;
WHEREAS, the Commissioner finds that the entry of this Order is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of the Act;
NOW THEREFORE THE COMMISSIONER ORDERS AS FOLLOWS:
| 1. |
In light of the legal and operational complexities surrounding implementation of Dodd-Frank, including but not limited to necessary upgrades to the Investment Adviser Registration Depository (IARD) system, the following classes of investment advisers will have until the dates specified below to fulfill applicable registration or notice filing requirements under the Act, absent an exclusion or exemption under the Act:
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| 2. | Investment advisers that would be subject to state registration requirements but for an applicable deferral in paragraph 1. above shall not be deemed “required to be registered” for purposes of Sections 36b-5(b) and 36b-5(c) of the Act during the term of the deferral; |
| 3. |
The terms of this Order apply only to those investment advisers described in subparagraphs (a), (b) and (c) of paragraph 1. above. All other investment advisers remain subject to applicable registration and notice filing requirements under the Act, including, without limitation, investment advisers commencing business on or after July 21, 2011 that are ineligible for federal registration under Section 203 of the Advisers Act as amended by Dodd-Frank. In addition, this Order does not address those investment advisers who would be exempt from federal registration under Section 203 of the Advisers Act as amended by Dodd-Frank, and the Commissioner may address the status of such advisers subsequent to the issuance of this Order; |
| 4. |
Effective July 21, 2011, and having been superseded by Dodd-Frank’s repeal of Section 203(b)(3) of the Advisers Act, the department’s October 14, 1997 Order Governing Certain Federally Exempt Investment Advisers, which covered private advisers previously relying on Section 203(b)(3) of the Advisers Act, is rescinded and shall no longer be in force and effect; |
| 5. | Nothing in this Order shall be construed to prohibit an investment adviser otherwise eligible for a deferral under paragraph 1. of this Order from voluntarily seeking investment adviser registration under the Act; and |
| 6. | This Order shall remain in effect until modified, superseded, withdrawn, rescinded or vacated by the Commissioner or other lawful authority. |
| So ordered at Hartford, Connecticut | _______/s/_________ | |
| this 11th day of July 2011. | Howard F. Pitkin | |
| Banking Commissioner |
1 Neither the fact that Rule 203-1(e) was adopted pursuant to the SEC’s general exemptive authority in Section 206A of the Advisers Act nor the fact that investment advisers relying on paragraph 1.(b) of this Order would not be SEC-registered during the deferral period should be construed as requiring that such investment advisers register as investment advisers under Section 36b-6(c) of the Act during the deferral period. Investment advisers qualifying for the deferral in paragraph 1.(b) of this Order would not be required to register as investment advisers under the Act during the deferment.
NOW THEREFORE THE COMMISSIONER ORDERS AS FOLLOWS:
| 1. | This Order shall be deemed issued and shall take effect on July 21, 2011. | |||||||||||||||||
| 2. |
The following investment advisers shall be exempt from the registration requirement in Section 36b-6(c)(1) of the Act:
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| 3. | An individual employed by or associated with an investment adviser relying on an exemption pursuant to this Order shall be exempt from having to register as an investment adviser agent under Section 36b-6(c)(2) of the Act by virtue of such individual’s activities on behalf of the exempt investment adviser. |
| 4. |
Effective July 21, 2011, and having been superseded by Dodd-Frank’s repeal of Section 203(b)(3) of the Advisers Act, the department’s October 14, 1997 Order Governing Certain Federally Exempt Investment Advisers, is rescinded and shall no longer be in force and effect; |
| 5. |
Nothing in this Order shall be construed to prohibit an investment adviser otherwise eligible for an exemption hereunder from voluntarily seeking investment adviser registration under the Act; and |
| 6. | This Order shall remain in effect until modified, superseded, withdrawn, rescinded or vacated by the Commissioner or other lawful authority. |
| Dated at Hartford, Connecticut | _______/s/_________ | |
| this 11th day of July 2011. | Howard F. Pitkin | |
| Banking Commissioner |
On March 4, 1999, the Banking Commissioner issued an Order Defining the Term “Client” for Purposes of the Connecticut De Minimis Exemption for Investment Advisers. The 1999 Order provided that: 1) for purposes of Section 36b-6(e)(3) of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act (the “Act”), the term “client” would be determined in accordance with Securities and Exchange Commission (“SEC”) Rule 203(b)(3)-1 under the Investment Advisers Act of 1940 (the “Advisers Act”); and 2) for purposes of Section 36b-6(e)(3) of the Act, the term “client” would be construed to incorporate any amendments or modifications to such term as contained in SEC Rule 203(b)(3)-1. On June 22, 2011, the SEC announced in Release No. IA-3221 (Rules Implementing Amendments to the Investment Advisers Act of 1940) that 1) it was rescinding Rule 203(b)(3)-1 under the Advisers Act effective 60 days following publication of the Release in the Federal Register; and 2) it was adopting amendments to Rule 222-2 under the Advisers Act to define “client” for purposes of the national de minimis standard by cross-referencing, for purposes of Section 222(d)(2) of the Advisers Act, the definition of “client” in Rule 202(a)(30)-1 rather than the definition in Rule 203(b)(3)-1. The following amended and restated version of the 1999 Order reflects the rescission of Rule 203(b)(3)-1 and conforms Connecticut law to federal law.
Text of Amended and Restated Order
WHEREAS, the Banking Commissioner (the “Commissioner”) is charged with the administration of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act (the “Act”) and Sections 36b-31-2 et seq. of the Regulations of Connecticut State Agencies promulgated under the Act;
WHEREAS, on July 8, 1998, Congressional amendments to Section 222 of the federal Investment Advisers Act of 1940 (codified as 15 U.S.C. Sec. 80b-18a) took effect, providing, in pertinent part, as follows:
(d) National de minimis standard
No law of any State or political subdivision thereof requiring the registration, licensing, or qualification as an investment adviser shall require an investment adviser to register with the securities commissioner of the State (or any agency or officer performing like functions) or to comply with such law (other than any provision thereof prohibiting fraudulent conduct) if the investment adviser - (1) does not have a place of business located within the State; and (2) during the preceding 12-month period, has had fewer than 6 clients who are residents of that State.
WHEREAS, in response to such amendments, the Connecticut General Assembly amended Section 36b-6 of the Act to provide a state de minimis exemption from registration in Section 36b-6(e)(3) of the Act for an investment adviser who “has no place of business in this state and, during the preceding twelve months, has had no more than five clients who are residents of this state”;
WHEREAS, 17 C.F.R. Sec. 275.222-2 states that: “For purposes of [the de minimis exemption in] section 222(d)(2) of the [federal Investment Advisers] Act (15 U.S.C. 80b-18a(d)(2)), an investment adviser may rely upon the definition of “client” provided by Sec. 275.203(b)(3)-1”;
WHEREAS, on March 4, 1999, the Commissioner issued an Order Defining the Term “Client” for Purposes of the Connecticut De Minimis Exemption for Investment Advisers (the “1999 Client Counting Order”). The 1999 Client Counting Order provided that: 1) for purposes of Section 36b-6(e)(3) of the Act, the term “client” would be determined in accordance with Securities and Exchange Commission (“SEC”) Rule 203(b)(3)-1 under the Investment Advisers Act of 1940 (the “Advisers Act”); and 2) for purposes of Section 36b-6(e)(3) of the Act, the term “client” would be construed to incorporate any amendments or modifications to such term as contained in SEC Rule 203(b)(3)-1;
WHEREAS, on June 22, 2011, the SEC announced in Release No. IA-3221 (Rules Implementing Amendments to the Investment Advisers Act of 1940) that 1) it was rescinding Rule 203(b)(3)-1 under the Advisers Act effective 60 days following publication of the Release in the Federal Register; and 2) it was adopting amendments to Rule 222-2 under the Advisers Act to define “client” for purposes of the national de minimis standard by cross-referencing, for purposes of Section 222(d)(2) of the Advisers Act, the definition of “client” in Rule 202(a)(30)-1 under the Advisers Act rather than the definition in Rule 203(b)(3)-1. The amendments to Rule 222-2 would take effect 60 days following their publication in the Federal Register;
WHEREAS, Section 36b-31(b) of the Act provides, in part, that: “No . . . order may be made, amended or rescinded unless the commissioner finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 36b-34, inclusive”;
WHEREAS, the Commissioner finds that, in promoting regulatory uniformity, the issuance of this Order is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of the Act;
NOW THEREFORE, THE COMMISSIONER ORDERS AS FOLLOWS:
| 1. | Investment advisers relying on the terms of the 1999 Client Counting Order may continue to do so up to the date Rule 203(b)(3)-1 under the Advisers Act is effectively rescinded and the amendments to SEC Rule 222-2 take effect; |
| 2. | Effective with the rescission of Rule 203(b)(3)-1 under the Advisers Act and the effectiveness of the corresponding amendments to Rule 222-2 under the Advisers Act, for purposes of Section 36b-6(e)(3) of the Act, the term “client” shall be determined in accordance with SEC Rule 202(a)(30)-1 without giving regard to paragraph (b)(4) of that section; |
| 3. | For purposes of Section 36b-6(e)(3) of the Act, the term “client” shall be construed to incorporate any amendments or modifications to such term as contained in SEC Rule 222-2 and SEC Rule 202(a)(30)-1; and |
| 4. | This order shall become final when issued, and shall remain in effect until modified, superseded, withdrawn, rescinded or vacated by the Commissioner or other lawful authority. |
Originally issued March 4, 1999
| Amended and Restated this | _______/s/_________ | |
| 11th day of July 2011. | Howard F. Pitkin | |
| Banking Commissioner |
|
Licensing At A Glance |
1st Quarter |
2nd Quarter |
3rd Quarter |
4th Quarter |
|---|---|---|---|---|
| Broker-dealers Registered | 2,397 | 2,444 | ||
| Broker-dealer Agents Registered | 145,618 | 149,085 | ||
| Broker-dealer Branch Offices Registered | 2,688 | 2,671 | ||
| Investment Advisers Registered | 485 | 491 | ||
| SEC Registered Advisers Filing Notice | 1,861 | 1,886 | ||
| Investment Adviser Agents Registered | 10,377 | 10,560 | ||
| Agents of Issuer Registered | 24 | 24 | ||
| Conditional Registrations |
0 |
0 |
|
Securities and Business |
1st Quarter |
2nd Quarter |
3rd Quarter |
4th Quarter |
Year to Date |
|---|---|---|---|---|---|
| Offerings Reviewed | 34 | 42 | 76 | ||
| Investment Company Notice Filings | 538 | 539 | 1,077 | ||
| Exemptions and Exemptive Notices | 776 | 744 | 1,520 | ||
| Examinations | |||||
| Broker-dealers | 15 | 18 | 33 | ||
| Investment Advisers | 11 | 13 | 24 | ||
| Securities Investigations | |||||
| Opened | 31 | 22 | 53 | ||
| Closed | 38 | 32 | 70 | ||
| Ongoing as of End of Quarter | 119 | 108 | |||
| Subpoenas issued | 8 | 15 | 23 | ||
| Matters referred from Attorney General | 5 | 1 | 6 | ||
| Matters referred from Other Agencies | 1 | 0 | 1 | ||
|
Business Opportunity Investigations | |||||
| Investigations Opened | 1 | 3 | 4 | ||
| Investigations Closed | 0 | 3 | 3 | ||
| Ongoing as of End of Quarter | 3 | 3 | |||
|
Enforcement: Remedies and Sanctions | |||||
| Notices of Intent to Deny (Licensing) | 0 |
1 |
1 | ||
| Notices of Intent to Suspend (Licensing) |
0 |
0 |
0 | ||
| Notices of Intent to Revoke (Licensing) |
0 |
3 |
3 | ||
| Denial Orders (Licensing) | 0 | 1 | 1 | ||
| Suspension Orders (Licensing) | 0 | 0 | 0 | ||
| Revocation Orders (Licensing) | 1 | 1 | 2 | ||
| Notices of Intent to Fine | 4 | 3 | 7 | ||
| Orders Imposing Fine | 2 | 1 | 3 | ||
| Cease and Desist Orders | 4 | 3 | 7 | ||
| Notices of Intent to Issue Stop Order | 0 | 0 | 0 | ||
| Activity Restrictions/Bars | 2 | 3 | 5 | ||
| Stop Orders | 0 | 0 | 0 | ||
| Vacating/Withdrawal/ Modification Orders | 0 | 0 | 0 | ||
| Restitutionary Orders | 0 | 2 | 2 | ||
| Injunctive Relief Obtained | 0 | 0 | 0 | ||
|
Proceedings and Settlements |
1st Quarter |
2nd Quarter |
3rd Quarter |
4th Quarter |
Year to Date |
| Administrative Actions |
5 |
6 |
11 | ||
| Consent Orders |
5 |
7 |
12 | ||
| Stipulation and Agreements |
3 |
0 |
3 | ||
|
Monetary Relief* |
1st Quarter |
2nd Quarter |
3rd Quarter |
4th Quarter |
Year to Date |
| Monetary Sanctions Imposed |
$668,550 |
$491,600 |
$1,160,150 | ||
| Restitution or Other Monetary Relief (includes rescission offer amounts) |
$18,049,151 |
$574,950 |
$18,624,101 | ||
|
*Cents eliminated Securities Referrals |
1st Quarter |
2nd Quarter |
3rd Quarter |
4th Quarter |
Year to Date |
| Criminal (Chief State's Attorney) |
1 |
5 |
6 | ||
| Civil (Attorney General) |
2 |
0 |
2 | ||
| Other Agency Referrals |
1 |
1 |
2 | ||