California Proposes Amendments to Rules under the Corporate Securities Law of 1968

August 30, 2007

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Earlier this month, the California Department of Corporations announced proposed changes to rules regulating investment advisers registered in California. According to the release, the objective in proposing the amendments is to increase uniformity with the model rules suggested by the North American Securities Administrators Association (NASAA), rules already in effect in other states, and rules established by the Securities and Exchange Commission (SEC). California is giving the public an opportunity to comment on the proposed changes. The time period for comment ends on October 30, 2007.

The proposed rules will have an impact on registered investment advisors in California, and all registered investment advisor firms doing business in California should take time to read the various releases and the text of the proposed rules. We feel the following are some of the more important changes proposed.

  • Requirement to establish and maintain written procedures designed to supervise employees and ensure their compliance with securities laws.
  • Incorporation of the principles governing performance-based advertising set forth in the 1996 SEC No-Action letter involving Clover Capital Management.
  • Requirement to provide all clients a written disclosure document containing the same information in Form ADV Part II. While we suggest all registered investment advisors provide a disclosure document to clients, apparently this has not been a requirement in California.
  • Amendment to the definition of custody and the procedures regarding custody. This rule will mirror the NASAA Model Rule for custody.
  • Rule requiring the implementation of codes of ethics. The rule will copy the same requirements set forth under the SEC’s codes of ethics rule (Rule 204A-1 under the Advisers Act).
  • Changes to “largely mirror” Rule 206(4)-3 of the Advisers Act which sets forth requirements that must be followed when fees are paid to solicitors.
  • The adoption and implementation of a business continuity plan.

You can read the California notice announcing the proposed changes, the statement of reasons for the proposed changes and the text of the new rules, on the California website.

RIA Compliance Consultants, Inc. can help your firm comply with these proposed changes. Contact us to find out more about our written compliance manual and code of ethics drafting and reviewing services.

Posted by Bryan Hill
Labels: Advertising, Code of Ethics, Custody, Form ADV, Solicitors