Recent Changes to Board Rules
TITLE 7. BANKING AND SECURITIES
PART 7. STATE SECURITIES BOARD
CHAPTER 109. TRANSACTIONS EXEMPT FROM REGISTRATION
7 TAC §109.6
The Texas State Securities Board proposes an amendment to §109.6, concerning investment adviser registration exemption for investment advice to financial institutions and certain institutional investors. The amendment would coordinate with new §139.23, a registration exemption for investment advisers to private funds, which is being concurrently proposed. The exclusion from the exemption in subsection (c) for advisers to "private funds" would be removed and language would be added to reference the new §139.23 exemption for private fund advisers. A grandfathering provision would be added as new subsection (e) to allow an investment adviser currently relying on §109.6 as it now exists for advisory services rendered to a "private fund" (as defined in new §139.23) to continue using the exemption in certain circumstances--if the private fund was in existence when §139.23 is adopted and the private fund ceases to accept new beneficial owners. The text in subsection (e), referencing an effective date for §139.23, would be replaced by a date certain at the time the amendment is adopted and these changes and §139.23 become effective.
This is a new version of the rule that was published in November 2012 and withdrawn at the January 2013 Board meeting. Unlike the previous proposal, subsection (a) now specifies that the "private fund" reference in §109.6(a) ties to the definition in new §139.23. The change in the prior proposal to the "accredited investor" definition is not included in the new proposal. Finally, the word "new" has been added before "beneficial owners" in the grandfather provision located in subsection (e) to acknowledge that certain transfers would not be considered to be a change in beneficial ownership. For example, the following would not be considered "new beneficial owners": donees of gifts (where the donor is a natural person, and the donee is either a natural person family member of donor (or an entity composed only of such family members, i.e., trusts, etc.) or is an IRC 501(c)(3) charitable organization); a successor who received the interest due to an involuntary transfer (examples would be legal separation, divorce, death, devise, bankruptcy, or receivership); or a "knowledgeable employee" of the issuer or adviser who replaces a departing knowledgeable employee.
Ronak V. Patel, Deputy Securities Commissioner, Tommy Green, Director, Inspections and Compliance Division, and Patricia Loutherback, Director, Registration Division, have determined that there will be fiscal implications as a result of enforcing or administering the rule on state, but not local government.
The effect on state government for the first five-year period the rule will be in effect would be increased revenue in the form of fees paid by the small number of investment advisers who are unable to continue to utilize the exemption pursuant to the grandfather provision in subsection (e) or the new exemption provided by proposed §139.23 and will be required to register or notice file in Texas. The increase in state revenue from each adviser in this small group would be $275 for the firm and $285 for each officer or investment adviser representative that is registered or notice filed in Texas and thereafter would be $270 and $275, respectively, for each annual renewal.
Mr. Patel, Mr. Green, and Ms. Loutherback also have determined that for each year of the first five years the rule is in effect the public benefit anticipated as a result of enforcing the rule will be to preserve the exemption for investment advisers who currently come within its provisions.
ECONOMIC IMPACT STATEMENT AND REGULATORY FLEXIBILITY ANALYSIS FOR SMALL AND MICRO-BUSINESS
The Agency estimates that there are approximately 1,660 investment adviser firms registered and approximately 4,559 notice filed in Texas. Among the total of 6,219 firms, approximately 89% are small businesses and 75% are micro-businesses, although among those registered, approximately 99% are small businesses and 95% are micro-businesses. Many of the notice-filed firms are located outside of Texas. The projected economic impact of the proposed amendment is expected to affect only a few investment advisers. Investment advisers who will not incur any additional costs are those who meet the grandfather provisions in subsection (e) because they can continue to claim the exemption as it existed prior to the amendment. Many investment advisers that can no longer claim the exemption in §109.6 after the rule is amended would be able to claim the new exemption provided in §139.23 and may incur the costs, if any, associated with that rule.
A small number of investment advisers will be required to register or notice file because they will not be grandfathered into §109.6 or able to transition to the exemption in new §139.23. Examples of investment advisers in this group are those who are "bad actors" or who have associated persons who are "bad actors," and advisers who have assets under management of $150 million or more. An investment adviser who registers or makes a notice filing in Texas will incur filing fees for the firm and for each officer or investment adviser representative that is registered or notice filed in Texas and thereafter would also pay fees for each annual renewal. Registering and notice-filing advisers also will be required to complete the Form ADV and would incur the expense of preparing that form. However, notice-filing advisers who are registered with the Securities and Exchange Commission have already prepared Form ADV in connection with their federal registration and therefore would incur no additional preparation cost for the submission in Texas as a result of this proposed rule. There will also be filing fees imposed by third parties for investment advisers and their representatives submitting the initial and annual filings through the Investment Adviser Registration Depository ("IARD").
Investment advisers who must register in Texas, rather than notice-file, would also face costs to bring their business operations into compliance with the Texas Securities Act and the Board rules. However, these costs are expected to vary significantly depending on the adviser's size, the scope and nature of its business, and the sophistication of its compliance infrastructure. Some advisers, whether registered or not, may have already established compliance infrastructures to fulfill their fiduciary duties towards their clients. Costs will likely be less for new registrants that have already established sound compliance practices and more for new registrants that have not yet established such practices. Costs will likely be lower for small or micro-businesses whose business models are generally less complex.
In preparing the proposal, the Agency considered several alternative methods for achieving the purposes of the amendment. One, the Agency considered repealing the provisions in the existing rule relating to private fund advisers, but determined that continuing to maintain the exemption for certain investment advisers would substantially reduce the number of small businesses having to pay new or increased compliance costs. Two, the Agency considered allowing additional private fund advisers to be grandfathered in, but decided that the investing public would benefit substantially from the protections provided by the amendment. Finally, the Agency considered not adopting the proposed amendment, but determined that in light of the approach adopted in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law No. 111-203, and by other state securities regulators, enhancing oversight of private funds and their managers by affording a greater degree of transparency would be consistent with protecting the health, safety and economic welfare of the state and the investing public.
Mr. Patel, Mr. Green, and Ms. Loutherback also have determined that, except for the costs discussed above, there are no additional anticipated economic costs to persons required to comply with the rule as proposed. There is no anticipated impact on local employment.
Comments on the proposal to be considered by the Board should be submitted in writing within 30 days after publication of the proposed section in the Texas Register. Comments should be sent to Marlene K. Sparkman, General Counsel, State Securities Board, P.O. Box 13167, Austin, Texas 78711-3167 or sent by facsimile to (512) 305-8336.
The amendment is proposed under Texas Civil Statutes, Articles 581-5.T, 581-12.C, and 581-28-1. Section 5.T provides that the Board may prescribe new exemptions by rule. Section 12.C provides the Board with the authority to prescribe new dealer, agent, investment adviser, or investment adviser representative registration exemptions by rule. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes.
The proposal affects Texas Civil Statutes, Articles 581-5, 581-12, 581-12-1, and 581-18.
§109.6.Investment Adviser Registration Exemption for Investment Advice to Financial Institutions and Certain Institutional Investors.
(a) Availability. The exemption from investment adviser and investment adviser representative registration provided by the Texas Securities Act, §5.H, or this section is not available if the financial institution or other institutional investor named therein is in fact acting only as agent for another purchaser that is not a financial institution or other institutional investor listed in §5.H or this section. These exemptions are available only if the financial institution or other institutional investor named therein is acting for its own account or as a bona fide trustee of a trust organized and existing other than for the purpose of acquiring the investment advisory services for which the investment adviser or investment adviser representative is claiming the exemption. For purposes of this section, an investment adviser or investment adviser representative that is providing investment advisory services to a corporation, general partnership, limited partnership, limited liability company, trust or other legal entity, other than a private fund (as that term is defined in §139.23 of this title (relating to Registration Exemption for Investment Advisers to Private Funds)), is not providing investment advisory services to a shareholder, general partner, member, other security holder, beneficiary or other beneficial owner of the legal entity unless the investment adviser provides investment advisory services to such owner separate and apart from the investment advisory services provided to the legal entity.
(b) (No change.)
(c) Exclusions from exemption. [Investment advice rendered to natural persons and private funds.] There is no exemption under this section for an investment adviser providing investment advisory services to a natural person. A private fund adviser, as that term is defined in §139.23 of this title (relating to Registration Exemption for Investment Advisers to Private Funds), may not rely on this exemption except as provided in subsection (e) of this section. [or to a private fund, such as a hedge fund, that is composed partially or entirely of natural persons. A "private fund" is an entity that:]
[(1) would be subject to regulation under the federal Investment Company Act of 1940 but for the exceptions from the definition of "investment company" provided for:]
[(A) a fund that has no more than 100 beneficial owners, or]
[(B) a fund that is owned exclusively by qualified purchasers who acquired ownership through a non-public offering;]
[(2) permits investors who are natural persons to redeem their interests in the fund within two years of purchasing them; and]
[(3) offers interests in the entity based on the investment advisory skills, ability or expertise of the investment adviser.]
(d) (No change.)
(e) Grandfathering. An investment adviser to a private fund, as that term is defined in §139.23 of this title (relating to Registration Exemption for Investment Advisers to Private Funds), may nonetheless qualify for the exemption described in subsection (b) of this section if:
(1) the private fund existed prior to the effective date of §139.23 of this title;
(2) the investment adviser qualified for the exemption in subsection (b) as modified by subsection (c) as both subsections of this section existed prior to the effective date of §139.23 of this title; and
(3) as of the effective date of §139.23 of this title, the private fund ceases to accept new beneficial owners.
This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.
Filed with the Office of the Secretary of State on September 19, 2013.
TRD-201304111
Securities Commissioner
State Securities Board
Earliest possible date of adoption: November 3, 2013
For further information, please call: (512) 305-8303
7 TAC §109.13
The Texas State Securities Board proposes an amendment to §109.13, concerning limited offering exemptions. The amendment would incorporate changes to Regulation D, Rule 506, that were recently adopted by the Securities and Exchange Commission ("SEC"). The Dodd-Frank Wall Street Reform and Consumer Protection Act required the adoption of bad actor rules "substantially similar" to the disqualifications in Rule 262 of Regulation A. In Release No. 33-9414, the SEC adopted final rules disqualifying felons and other bad actors from participating in offerings that rely on the exemption in Rule 506. In Release No. 33-9415, the SEC followed the Congressional directive in the Jumpstart Our Business Startups Act ("JOBS Act") to eliminate the prohibition against general solicitation and general advertising in Rule 506 offerings. As amended, Rule 506 would permit an issuer to engage in general solicitation or general advertising in offering and selling securities pursuant to Rule 506, provided that all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that such purchasers are accredited investors.
Patricia Loutherback, Director, Registration Division, has determined that for the first five-year period the rule is in effect there will be no foreseeable fiscal implications for state or local government as a result of enforcing or administering the rule.
Ms. Loutherback also has determined that for each year of the first five years the rule is in effect the public benefit anticipated as a result of enforcing the rule will be that the provisions will coordinate with federal standards and requirements. There will be no effect on micro- or small businesses. There is no anticipated economic cost to persons who are required to comply with the rule as proposed. There is no anticipated impact on local employment.
The amendment is proposed under Texas Civil Statutes, Articles 581-5.T and 581-28-1. Section 5.T provides that the Board may prescribe new exemptions by rule. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes.
The proposal affects Texas Civil Statutes, Articles 581-5 and 581-7.
§109.13.Limited Offering Exemptions.
(a) - (j) (No change.)
(k) Uniform limited offering exemption. In addition to sales made under the Texas Securities Act, §5.I, the State Securities Board, pursuant to the Act, §5.T, exempts from the registration requirements of the Act, §7, any offer or sale of securities offered or sold in compliance with the Securities Act of 1933, Regulation D, Rules 230.505 and/or 230.506, including any offer or sale made exempt by application of Rule 508(a), as made effective in United States Securities and Exchange Commission Release Number 33-6389 and as amended in Release Numbers 33-6437, 33-6663, 33-6758, 33-6825, 33-6863, 33-6902, 33-6949, 33-6996, 33-7470, 33-8876, [and] 33-8891, 33-9414, and 33-9415, and as adjusted by The Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, and which satisfies the following further conditions and limitations.
(1) - (17) (No change.)
(l) (No change.)
CHAPTER 115. SECURITIES DEALERS AND AGENTS
The Texas State Securities Board proposes an amendment to §115.18, concerning special application provisions available to a military spouse, military service member, or military veteran. The proposal is required by Senate Bill ("SB") 162, passed by the 83rd Texas Legislature. SB 162 requires licensing agencies to provide an additional alternative licensing procedure for military spouses and new alternative procedures for military service members and veterans seeking a registration or license in Texas. A related form is being concurrently proposed as is a comparable amendment for investment adviser and investment adviser representative applications.
Subsection (a) would be changed to add definitions for "military service member" and "military veteran" and amend the definition for "military spouse" to comport with the definitions added by SB 162.
The procedure in the current rule is preserved in subsection (b). It allows a military spouse to request special consideration of his or her application if the application is not processed within five calendar days of submission. Applicants going forward under this procedure would have to meet all the requirements to obtain a registration; they would "jump to the head of the line" in the review process so deficiencies would be identified earlier and addressed. A change is being made to give the staff five business days, rather than five calendar days, to respond to the applicant.
Subsection (c) addresses the new procedure, added by SB 162, that would also be applicable to military spouses. It would apply to a military spouse licensed in another jurisdiction or through a branch of the armed forces as long as the requirements for that license are substantially equivalent to the Texas requirements. An applicant who qualifies for special consideration under this provision would be registered despite having deficiencies that would hold up a regular registration. Staff will notify the military spouse of all deficiencies within five business days from approval of the registration. The applicant then has a 12-month "grace period" to remedy the deficiencies. The registration of an applicant who has failed to resolve the deficiencies at the end of the 12-month period will be automatically terminated.
Staff does not anticipate many applicants will use this procedure. The most common deficiency seen at registration is a lack of required examinations. Since most other states require the same examinations for dealer/agent registration as Texas, the prerequisite that the applicant be licensed in another state will mean that they will likely already have taken and passed the examinations required for Texas registration.
Subsection (d) sets out the new procedure, added by SB 162, for military service members and military veterans. The new procedure allows comparable military service, training, or education to be credited towards the registration requirements, except for an examination requirement. Staff is not currently aware of any military experience that would be eligible for such credit. This procedure would not be available to military service members or veterans whose registration in another state is not in good standing or who have been convicted of a crime that could be the grounds for denial of registration under §14.A of the Texas Securities Act.
The provisions in subsection (e) are relocated from other provisions in the existing rule and made applicable to all of the special circumstances addressed in subsections (b) through (d).
Subsection (f) allows for additional information requests for applicants receiving special consideration. Although not exhaustive, an applicant may be required to provide documentation to demonstrate his or her military status that qualifies the applicant for special consideration under the rule, information on training or other competency that would substitute for an application requirement, or information to assist staff in determining financial responsibility, business repute, or qualifications.
The requests for special consideration under this section would be made on new Form 133.4, Request for Special Consideration of a Registration Application by a Military Spouse, Military Service Member, or Military Veteran, which would replace the current Form 133.4, Military Spouse Request for Expedited Review.
Patricia Loutherback, Director, Registration Division, and Tommy Green, Director, Inspections and Compliance Division, have determined that for the first five-year period the rule is in effect, there will be no foreseeable fiscal implications for state or local government as a result of enforcing or administering the rule.
Ms. Loutherback and Mr. Green also have determined that for each year of the first five years the rule is in effect, the public benefit anticipated as a result of enforcing the rule will be that a military spouse already licensed in another jurisdiction can request special consideration when applying for registration in Texas and a military service member or veteran can receive credit for comparable military service, training or education when applying for a Texas registration. There will be no effect on micro- or small businesses. There is no anticipated economic cost to persons who are required to comply with the rule as proposed. There is no anticipated impact on local employment.
The amendment is proposed under Texas Civil Statutes, Article 581-28-1 and Chapter 55 of the Texas Occupations Code. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes. Chapter 55 of the Texas Occupations Code authorizes the agency to adopt rules for licensure or registration for a person who is a military spouse, military service member, or military veteran who meets certain criteria.
The proposal affects Texas Civil Statutes, Articles 581-12, 581-13, 581-14, 581-15, and 581-18.
§115.18.Special Application Provisions Available to a [Qualified] Military Spouse, Military Service Member, or Military Veteran [Request for Expedited Review of an Application for Registration].
(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.
(1) Current registration--A registration or license that is:
(A) issued by another state, the District of Columbia, or a territory of the United States that has registration requirements that are substantially equivalent to the requirements for a Texas registration in the same capacity;
(B) - (C) (No change.)
(2) (No change.)
(3) [Qualified] Military spouse--An applicant who is married to a military service member who is currently [the spouse of an individual serving] on active duty. [as a member of the armed forces of the United States assigned to a military unit headquartered in Texas, and who:]
[(A) holds a current registration in another state, the District of Columbia, or a territory of the United States, that has registration requirements that are substantially equivalent to the requirements for a Texas registration in the same capacity; or]
[(B) has been registered in Texas in the same capacity within the five years preceding the date of the application for registration, but whose registration in Texas expired while the applicant lived in another state for at least six months.]
(4) Military service member--A person who is currently serving in the armed forces of the United States, in a reserve component of the armed forces of the United States, including the National Guard, or in the state military service of any state.
(5) Military veteran--A person who has served in the Army, Navy, Air Force, Marine Corps, or Coast Guard of the United States, or in the auxiliary service of one of those branches of the armed forces.
(b) Alternative procedure for a military spouse as authorized by Occupations Code, §55.004 [Request for expedited review].
(1) An applicant who is a [A qualified] military spouse may use the procedure set out in this subsection if:
(A) the applicant holds a current registration in another jurisdiction; or
(B) has been registered in Texas in the same capacity within the five years preceding the date of the application for registration, but whose registration in Texas expired while the applicant lived in another state for at least six months.
(2) If the applicant [who] is not registered within five days of submitting an application, the applicant may request special consideration [expedited review] of his or her application for registration by filing Form 133.4, [Military Spouse] Request for Special Consideration of a Registration Application by a Military Spouse, Military Service Member, or Military Veteran [Expedited Review], with the Securities Commissioner ("Commissioner"). Within five business days of [An application for registration from an applicant qualifying under this section shall be expedited by the Registration Division. Upon] receipt of the completed Form 133.4, the [Commissioner will notify the] applicant will be notified in writing [within five days that the applicant is entitled to an expedited review] of the [application and will advise the applicant the] reason(s) for the pending or deficient status assigned to the application.
(3) In addition to the waivers of examination requirements set out in §115.3 of this title (relating to Examination), the Commissioner in his or her discretion is authorized by the Board to grant full or partial waivers of the examination requirements of the Texas Securities Act, §13.D, on a showing of alternative demonstrations of competency to meet the requirements for obtaining the registration sought.
(c) Expedited review of an application submitted by a military spouse as authorized by Occupations Code, §55.005 and §55.006.
(1) An applicant who is a military spouse may use the procedure set out in this subsection if the applicant holds a current registration in another jurisdiction.
(2) If the applicant is not registered within five days of submitting an application, the applicant may request special consideration of his or her application for registration by filing Form 133.4, Request for Special Consideration of a Registration Application by a Military Spouse, Military Service Member, or Military Veteran, with the Commissioner.
(3) An applicant proceeding under this subsection may be registered despite having pending and/or deficient items ("deficiencies"). The deficiencies will be communicated to the applicant in writing or by electronic means within five business days from approval of the registration.
(4) The deficiencies noted at the time the registration is granted must be resolved by the applicant within a 12 month period. Failure to resolve outstanding deficiencies will cause the registration granted under this subsection or any renewal of such registration to automatically terminate 12 months after the date the registration was initially granted pursuant to this subsection.
(d) Registration of persons with military experience as authorized by Occupations Code, §55.007.
(1) An applicant who is a military service member or military veteran may request special consideration of verified military service, training, or education towards registration requirements, other than an examination requirement, for the registration sought by submitting Form 133.4, Request for Special Consideration of a Registration Application by a Military Spouse, Military Service Member, or Military Veteran, with the applicant's registration application.
(2) The procedure authorized by this subsection is not available to a military service member or military veteran who:
(A) is registered in another jurisdiction but such registration is not in good standing; or
(B) has been convicted of a crime that could be the basis for denial of the registration pursuant to the Texas Securities Act, §14.A.
(e) [(c)] Other provisions in this chapter.
(1) [Applicability.] Unless specifically allowed in this section, an applicant must meet the requirements for registration or renewal specified in this chapter. This includes the requirement that certain filings be made electronically through the CRD.
[(2) Exceptions.]
(2) [(A)] A one-year period, instead of the 90-day period contained in §115.2 of this title (relating to Application Requirements), will apply to the automatic withdrawal of an application for which a Form 133.4 is properly filed.
[(B) In addition to the waivers of examination requirements set out in §115.3 of this title (relating to Examination), the Commissioner in his or her discretion is authorized by the Board to grant full or partial waivers of the examination requirements of the Texas Securities Act, §13.D, on a showing of alternative demonstrations of competency to meet the requirements for obtaining the registration sought.]
(f) [(d)] Additional information. An applicant receiving special consideration pursuant to this section in connection with a registration application [requesting expedited review] shall provide any other information deemed necessary by the Commissioner. Such information may include, but is not limited to documentation:
(1) demonstrating status as a military spouse, service member, or military veteran;
(2) to determine whether the applicant meets licensing requirements through some alternative method;
(3) relating to prior military service, training, or education that may be credited towards a registration requirement; or
(4) to determine a dealer's financial responsibility or a dealer's or agent's business repute or qualifications.
CHAPTER 116. INVESTMENT ADVISERS AND INVESTMENT ADVISER REPRESENTATIVES
The Texas State Securities Board proposes an amendment to §116.18, concerning special application provisions available to a military spouse, military service member, or military veteran. The proposal is required by Senate Bill ("SB") 162, passed by the 83rd Texas Legislature. SB 162 requires licensing agencies to provide an additional alternative licensing procedure for military spouses and new alternative procedures for military service members and veterans seeking a registration or license in Texas. A related form is being concurrently proposed as is a comparable amendment for dealer and agent applications.
Staff does not anticipate many applicants will use this procedure. The most common deficiency seen at registration is a lack of required examinations. Since most other states require the same examinations for investment adviser/investment adviser representative registration as Texas, the prerequisite that the applicant be licensed in another state will mean that they will likely already have taken and passed the examinations required for Texas registration.
Ms. Loutherback and Mr. Green also have determined that for each year of the first five years the rule is in effect, the public benefit anticipated as a result of enforcing the rule will be that a military spouse already licensed in another jurisdiction can receive special consideration when applying for registration in Texas and a military service member or veteran can receive credit for comparable military service, training or education when applying for Texas registration. There will be no effect on micro- or small businesses. There is no anticipated economic cost to persons who are required to comply with the rule as proposed. There is no anticipated impact on local employment.
The amendment is proposed under Texas Civil Statutes, Article 581-28-1 and Chapter 55 of the Texas Occupations Code. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes. Chapter 55 of the Texas Occupations Code authorizes the agency to adopt rules for licensure or registration of a person who is a military spouse, military service member, or military veteran who meets certain criteria.
(1) [Applicability.] Unless specifically allowed in this section, an applicant must meet the requirements for registration or renewal specified in this chapter. This includes the requirement that certain filings be made electronically through the IARD.
(4) to determine an investment adviser's financial responsibility or an investment adviser's or investment adviser representative's business repute or qualifications.
CHAPTER 133. FORMS
(Editor's note: The text of the following section proposed for repeal will not be published. The section may be examined in the offices of the State Securities Board or in the Texas Register office, James Earl Rudder Building, 1019 Brazos Street, Austin, Texas.)
The Texas State Securities Board proposes the repeal of §133.4, which adopts by reference a form concerning military spouse request for expedited review. Repeal of the existing form would allow for the simultaneous adoption of a new form, which is being concurrently proposed
Ms. Loutherback and Mr. Green also have determined that for each year of the first five years the rule is in effect, the public benefit anticipated as a result of enforcing the rule will be that a military spouse already licensed in another jurisdiction and a military service member or veteran can complete the form to request special consideration or credit pursuant to §115.18 or §116.18. There will be no effect on micro- or small businesses. There is no anticipated economic cost to persons who are required to comply with the rule as proposed. There is no anticipated impact on local employment.
Comments on the proposal to be considered by the Board should be submitted in writing within 30 days after publication of the proposed section in the Texas Register. Comments should be sent to Marlene K. Sparkman, General Counsel, State Securities Board, P.O. Box 13167, Austin, Texas 78711-3167, or sent by facsimile to (512) 305-8336.
The repeal is proposed under Texas Civil Statutes, Article 581-28-1 and Chapter 55 of the Texas Occupations Code. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes. Chapter 55 of the Texas Occupations Code authorizes the agency to adopt rules for licensure or registration for a person who is a military spouse, military service member, or military veteran who meets certain criteria.
§133.4.Military Spouse Request for Expedited Review.
The Texas State Securities Board proposes new §133.4, which adopts by reference a form concerning request for special consideration of a registration application by a military spouse, military service member, or military veteran. The form will allow a military spouse already licensed in another jurisdiction and a military service member or veteran to request special consideration or credit for comparable military service, training or education pursuant to §115.18 or §116.18, which are being concurrently amended. Existing form §133.4 is being concurrently proposed for repeal.
The new section is proposed under Texas Civil Statutes, Article 581-28-1 and Chapter 55 of the Texas Occupations Code. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes. Chapter 55 of the Texas Occupations Code authorizes the agency to adopt rules for licensure or registration of a person who is a military spouse, military service member, or military veteran who meets certain criteria.
§133.4.Request for Special Consideration of a Registration Application by a Military Spouse, Military Service Member, or Military Veteran.
The State Securities Board adopts by reference Form 133.4, Request for Special Consideration of a Registration Application by a Military Spouse, Military Service Member, or Military Veteran. This form is available from the State Securities Board, P.O. Box 13167, Austin, Texas 78711-3167.
CHAPTER 139. EXEMPTIONS BY RULE OR ORDER
The Texas State Securities Board proposes new §139.23, concerning registration exemption for investment advisers to private funds. The new rule would provide a registration exemption for investment advisers to private funds and was developed through negotiations between the Agency Staff and a subcommittee of the Securities Law Committee of the State Bar of Texas. A related amendment is being concurrently proposed to §109.6, concerning investment adviser registration exemption for investment advice to financial institutions and certain institutional investors.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law No. 111-203 ("Dodd-Frank") made substantial changes to the regulation of private funds. Dodd-Frank mandated Securities and Exchange Commission ("SEC") registration for investment advisers to private funds if they have assets under management of at least $150 million and subjected them to recordkeeping and disclosure requirements.
In general, private funds include, but are not limited to, hedge funds, private equity funds, and venture capital funds, and are considered to be professionally managed pools of assets that are not subject to regulation under the Investment Company Act of 1940. Private funds seek to qualify for one of two exceptions from regulation under the Investment Company Act by either limiting themselves to 100 total investors (3(c)(1) funds) or by permitting only "qualified purchasers" to invest (3(c)(7) funds).
The SEC provides an exemption from the registration requirements under the Investment Advisers Act of 1940 for an investment adviser that acts solely as an adviser to private funds and has assets under management of less than $150 million. Although exempt from federal registration, these advisers must file reports with the SEC and are called "exempt reporting advisers." The proposed exemption would extend this filing requirement to private fund investment advisers who utilize the exemption so that the Agency would have comparable information on advisers using the exemption. Alternatively, some investment advisers to private funds with assets under management of more than $100 million can opt to register with the SEC.
The proposed exemption would cease to be available for an investment adviser once the adviser becomes registered with the SEC. At that point, the adviser would then make a notice filing in Texas. As with other investment adviser exemptions, the adviser's representatives whose activities are similarly limited are covered by the adviser's exemption from registration. Although the proposed exemption does not specifically address the disclosures that must be made by the exempt investment adviser, the general antifraud provisions of the Texas Securities Act would apply.
Subsection (b)(2) of the proposal contains bad-actor disqualifications applicable to the investment adviser and to its advisory affiliates. Subsection (b)(3) automatically waives the disqualifications if the party is licensed or registered to conduct securities or investment advisory business in the state where the disqualification was created. It also provides for waiver of the disqualification at the discretion of the Securities Commissioner upon a showing of good cause.
Subsection (c) of the proposal imposes additional restrictions on 3(c)(1) funds. If the 3(c)(1) fund is not a private equity fund, real estate fund, or venture capital fund, it must be beneficially owned by persons who meet the definition of qualified client. "Qualified client" is a higher standard than that of accredited investor.
The proposed rule provides if a qualified client is an entity that was organized for the purpose of acquiring an interest in the 3(c)(1) fund, all of the beneficial owners of the entity must also be qualified clients. Under this provision, each "tier" of beneficial ownership must be examined in a like manner. Thus, the adviser must look through each such entity to determine that all beneficial owners at each level are qualified clients.
Conversely, a 3(c)(1) fund that is a private equity fund, real estate fund, or venture capital fund can be owned by persons that are not qualified clients and who could be accredited or nonaccredited investors. Additionally, an adviser who has any 3(c)(1) fund customers who are not a private equity fund, real estate fund, or venture capital fund must comply with §116.17, relating to custody of funds or securities of clients by registered investment advisers, with respect to all the funds it advises.
Since an exempt investment adviser is no longer subject to unannounced inspection pursuant to §13-1 of the Texas Securities Act, subsection (f) adds a requirement whereby the Securities Commissioner can make a written request for the investment adviser's records that relate to the providing of investment advisory services to a private fund.
This is a new version of the rule that was published in November 2012 and withdrawn at the January 2013 Board meeting. Unlike the previous proposal, the definition of "private fund" in subsection (a)(2) of the new rule proposal has been amended to use "but for" language. Accordingly, a fund would not be considered to be a "private fund" if it qualifies for an exclusion from the definition of an investment company in the Investment Company Act, §3, other than, or in addition to, 3(c)(1) or 3(c)(7).
Subsection (b) has also been revised from the prior proposal based on new information we have received concerning how an adviser will be able to file the Form ADV electronically with the state and elect exempt reporting adviser status. Private fund advisers with less than $25 million in assets under management will be able to electronically file their Form ADV as exempt reporting advisers without filing as such with the SEC. Accordingly, subsection (b) requires all private fund advisers filing pursuant to §139.23 to do so electronically through the Investment Adviser Registration Depository ("IARD") system. Also, a new disqualification provision has been added concerning bars.
The effect on state government for the first five-year period the rule will be in effect is loss of revenue. Certain investment advisors previously registered with the Agency may now be able to claim this exemption and thereby avoid paying registration fees. However, this may be offset to some extent by the registration or notice filing fees paid by investment advisers that are ineligible for this proposed exemption and are unable to fit within the grandfathering provisions in the §109.6 exemption, which is proposed to be amended in conjunction with this proposal. The annual loss in state revenue from each adviser in this small group would be $270 for the firm and $275 for each officer or investment adviser representative that no longer files for renewal of its registration or notice filing.
Mr. Patel, Mr. Green, and Ms. Loutherback also have determined that for each year of the first five years the rule is in effect the public benefit anticipated as a result of enforcing the rule will be to enhance transparency regarding investment advisers who no longer qualify for the exemption contained in §109.6.
The Agency estimates that there are approximately 1,660 investment adviser firms registered and approximately 4,559 notice filed in Texas. Among the total of 6,219 firms, approximately 89% are small businesses and 75% are micro-businesses, although among those registered, approximately 99% are small businesses and 95% are micro-businesses. Many of the notice-filed firms are located outside of Texas. The projected economic impact of this proposed rule will be increased costs of compliance for a small number of investment advisers claiming the exemption. However, the amount of those costs will vary based on the complexity of their operations.
Investment advisers with less than $25 million in assets under management who claim the exemption contained in the proposed rule would incur costs to complete and update related reports on Form ADV. Larger investment advisers using the exemption, those with assets under management of between $25 million and $150 million, are exempt reporting advisers and would already be required under the SEC rules to make the filing the proposed rule requires in subsection (b)(1). Therefore, they would not incur any additional preparation cost as a result of this proposed rule.
The proposed rule does not impose any filing fee upon either the investment advisers or their representatives who qualify for the exemption.
Some subset of advisers that use the exemption will be required to comply with the annual surprise audit requirement in §116.17, relating to custody of funds or securities of clients. A "surprise audit" is one pursuant to a written agreement between the investment adviser and the accountant that is conducted at a time chosen by the accountant without prior notice or announcement to the investment adviser and that is irregular from year to year. There will be an economic cost to those private fund advisers that are required to comply with the surprise audit requirement of §116.17, although the cost is expected to vary depending on the size of the firm. However, it is anticipated that many investment advisers will fall within one of the six exceptions to the surprise audit requirement that appear in §116.17(c), including the two discussed above.
However, advisers with "indirect" custody solely as a result of the investment adviser's authority to withdraw its fees from the client's account have an exception from §116.17. Additionally, advisers of limited partnerships or pooled investment vehicles (i.e., hedge funds) would also have an exception from the annual surprise audit requirement if the pooled investment vehicle is subject to an annual audit by a Public Company Accounting Oversight Board ("PCAOB") Registered Accountant and the adviser distributes copies of the audited financials to each investor within 120 days of the pool's fiscal year end.
There may be additional costs for those investment advisers who have not previously retained a PCAOB Registered Accountant and those costs per annual audit would depend on the size of the firm and the number of clients for which it has custody of funds or securities.
The cost to prepare an internal control report relating to custody will vary based on the size and services offered by the qualified custodian.
In preparing the proposal, the Agency considered several alternative methods for achieving the purposes of the new rule. One, the Agency considered not requiring small investment advisers claiming the exemption to complete and update related reports on Form ADV, but determined that the investing public would benefit from this reporting requirement. Two, the Agency considered not requiring private fund advisers to comply with the "surprise audit" requirement of §116.17, but decided that the investing public would benefit from the protections provided by this requirement. Finally, the Agency considered not adopting the proposed amendment, but determined that in light of the approach adopted in Dodd-Frank and by other state securities regulators, enhancing oversight of private funds and their managers by affording a greater degree of transparency would be consistent with protecting the health, safety and economic welfare of the state and the investing public.
The new rule is proposed under Texas Civil Statutes, Articles 581-5.T, 581-12.C, and 581-28-1. Section 5.T provides that the Board may prescribe new exemptions by rule. Section 12.C provides the Board with the authority to prescribe new dealer, agent, investment adviser, or investment adviser representative registration exemptions by rule. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes.
The proposal affects Texas Civil Statutes, Articles 581-5, 581-7, 581-12, 581-12-1, and 581-18.
§139.23.Registration Exemption for Investment Advisers to Private Funds.
(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise:
(1) Private Fund Adviser--An investment adviser who provides advice:
(A) solely to one or more Private Funds; or
(B) solely to one or more Private Funds and other clients, who are not Private Funds, to whom advice may be provided pursuant to another exemption from investment adviser registration provided under the Texas Securities Act or Board rules.
(2) Private Fund--An issuer that would be an investment company as defined in the Investment Company Act of 1940, §3, but for an exclusion from the definition of an investment company in §3(c)(1) or §3(c)(7) of that Act, 15 U.S.C. §80a.
(3) 3(c)(1) Fund--A Private Fund that relies solely on the exclusion from the definition of an investment company under §3(c)(1) of the Investment Company Act of 1940, 15 U.S.C. §80a-3(c)(l).
(4) Private Equity Fund--A Private Fund that meets the definition of a private equity fund in the Instructions to Part 1A of Form ADV.
(5) Real Estate Fund--A Private Fund that meets the definition of a real estate fund in the Instructions to Part IA of Form ADV.
(6) Venture Capital Fund A Private Fund that meets the definition of a venture capital fund in SEC Rule 203(l)-1, 17 CFR §275.203(l)-1.
(b) Exemption for Private Fund Advisers. Subject to the additional requirements of this section, the State Securities Board, pursuant to the Texas Securities Act, §5.T and §12.C, exempts from the investment adviser registration requirements of the Texas Securities Act, §12, a Private Fund Adviser satisfying each of the following conditions and limitations:
(1) The Private Fund Adviser files with the Securities Commissioner 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 CFR §275.204-4. These filings are to be made electronically through the Investment Adviser Registration Depository (IARD). A report shall be deemed filed when the report required by subsection (b) of this section is filed and accepted by the IARD on the state's behalf.
(2) Except as provided in paragraph (3) of this subsection, neither the Private Fund Adviser, nor any of its advisory affiliates, as that term is defined in the Instructions to Part IA of Form ADV, are subject to the following disqualifications:
(A) any of those described in Rule 262 of SEC Regulation A, 17 CFR §230.262;
(B) has been convicted within five years prior to the filing of the notice required under this exemption of any felony or misdemeanor involving the offer, purchase, or sale of any security or the rendering of investment advice, or any felony involving embezzlement, obtaining money under false pretenses, larceny, or conspiracy to defraud;
(C) is currently subject to any order, judgment, or decree of any court of competent jurisdiction, entered within the last five years, temporarily, preliminarily, or permanently restraining or enjoining such party from engaging in or continuing to engage in any conduct or practice involving fraud or deceit in connection with the purchase or sale of a security or the rendering of investment advice;
(D) is the subject of a United States Postal Service fraud order that is currently effective and was issued within the last five years;
(E) is currently subject to any state or federal administrative enforcement order or judgment, entered within the last five years, finding fraud or deceit in connection with the purchase or sale of a security or the rendering of investment advice;
(F) is subject to an order issued by a state or federal authority that bars the person from association with an entity regulated by the authority that issued the order, or from engaging in the business of securities, insurance, or banking, or savings association or credit union activities; or
(G) is the subject of a suspension or expulsion from membership in or association with a member of a self-regulatory organization that is currently effective and was issued within the last five years.
(3) Exceptions from disqualifications. The prohibitions of paragraph (2) of this subsection shall not apply if:
(A) the party subject to the disqualification is duly licensed or registered to conduct securities related business or render investment advisory services in the state in which the order, judgment, or decree creating the disqualification was entered against such party; or
(B) before investment advisory services are rendered under this section, the Securities Commissioner, or the court or regulatory authority that entered the order, judgment, or decree, waives the disqualification upon a showing of good cause.
(c) Additional requirements for Private Fund Advisers to certain 3(c)(1) Funds. In order to qualify for an exemption pursuant to this section, a Private Fund Adviser who advises at least one 3(c)(l) Fund that is not a Private Equity Fund, Real Estate Fund, or Venture Capital Fund shall comply with the following additional requirements:
(1) the Private Fund Adviser shall advise only those 3(c)(1) Funds (other than Private Equity Funds, Real Estate Funds, and Venture Capital Funds) whose outstanding securities (other than short-term paper) are beneficially owned entirely by persons who would each meet the definition of a qualified client in SEC Rule 205-3, 17 CFR §275.205-3, at the time the securities are purchased from the issuer; provided that if an entity was organized and exists only for the purpose of acquiring an interest in the 3(c)(1) Fund, each beneficial owner of such entity must be a qualified client; and
(2) the Private Fund Adviser shall comply with §116.17 of this title (relating to Custody of Funds or Securities of Clients by Registered Investment Advisers) as if registered.
(d) Federal covered investment advisers. If a Private Fund Adviser is registered with the Securities and Exchange Commission, the adviser shall not be eligible for this exemption and shall comply with the state notice filing requirements applicable to federal covered investment advisers in the Texas Securities Act, §12-1.
(e) Investment adviser representatives. An investment adviser representative is exempt from the registration requirements of the Texas Securities Act, §12, if he or she is employed by or associated with an investment adviser that is exempt from investment adviser registration in this state pursuant to this section and does not otherwise act as an investment adviser representative.
(f) Requests for records.
(1) Upon a written request from the Securities Commissioner or the Commissioner's authorized representative, an investment adviser relying on an exemption provided by this section shall make available to the Commissioner all records subject to the custody or control of the investment adviser related to any private fund to which the investment adviser provides investment advice.
(2) Failure to comply with this subsection will result in the loss of the exemption provided by this section.
The Texas State Securities Board proposes new §139.24, concerning charitable organizations assisting economically disadvantaged clients with Texas qualified tuition program plans. The new rule would provide a registration exemption for a charitable organization and its financial coaches or counselors when they assist economically disadvantaged clients with Texas qualified tuition program plans. This draft rule proposal was developed in response to testimony presented during a hearing in the last legislative session regarding House Bill 3486, relating to the removal of certain barriers to saving for economically disadvantaged persons, and with the input of several of the community groups who provided that testimony.
As long as the financial coach or counselor's activities are limited as provided for in subsections (b) and (c), the financial coach or counselor would not be required to register with the Agency to provide that assistance. A financial coach or counselor would not be considered to be making a sale of a prepaid tuition contract if the activities are restricted to those permitted by the section.
Patricia Loutherback, Director, Registration Division, has determined that for the first five-year period the rule is in effect, there will be no foreseeable fiscal implications for state or local government as a result of enforcing or administering the rule.
Ms. Loutherback also has determined that for each year of the first five years the rule is in effect, the public benefit anticipated as a result of enforcing the rule will be that charitable organizations and their financial coaches or counselors can assist economically disadvantaged clients with Texas qualified tuition plans without registering as dealers, agents, investment advisers, or investment adviser representatives. There will be no effect on micro- or small businesses. There is no anticipated economic cost to persons who are required to comply with the rule as proposed. There is no anticipated impact on local employment.
The proposal affects Texas Civil Statutes, Articles 581-12 and 581-18.
§139.24.Charitable Organizations Assisting Economically Disadvantaged Clients with Texas Qualified Tuition Program Plans.
(a) Definitions. The following words and terms, when used in this section, shall have the following meanings unless the context clearly indicates otherwise.
(1) Charitable organization--A 501(c)(3) nonprofit organization located in Texas that provides services to economically disadvantaged individuals and families.
(2) Client--An individual receiving services from a financial coach or counselor of a charitable organization relating to a Texas qualified tuition program plan.
(3) Economically disadvantaged--Eligible for services based on criteria established by a charitable organization and poverty guidelines updated periodically in the Federal Register by the U.S. Department of Health and Human Services under the authority of 42 U.S.C. 9902(2).
(4) Financial coach or counselor--An individual acting on behalf of a charitable organization in counseling economically disadvantaged clients of the charitable organization.
(5) Texas qualified tuition program plan--A fund or plan established under the Texas Education Code, Chapter 54, Subchapter G, H, or I, as amended.
(b) Exemption from dealer, agent, investment adviser, and investment adviser representative registration. The State Securities Board, pursuant to the Texas Securities Act, §12.C, exempts a charitable organization and its financial coaches and counselors from the dealer, agent, investment adviser, and investment adviser representative registration requirements of the Texas Securities Act, when their securities-related activities are limited to:
(1) assisting economically disadvantaged clients with completing documentation necessary to enroll or make a contribution to a Texas qualified tuition program plan; and
(2) providing materials relating to a Texas qualified tuition program plan that have been prepared on behalf of or approved by the plan manager or administrator of a Texas qualified tuition program plan, Texas Prepaid Higher Education Tuition Board, Office of the Comptroller of Public Accounts, Texas State Securities Board, Texas Match the Promise Foundation, or a tax-exempt charitable organization established by law to implement the Texas Save and Match Program.
(c) Prohibited activities. A charitable organization and its financial coaches and counselors are prohibited from the following activities in connection with a client's enrollment in or contribution to a Texas qualified tuition program plan:
(1) selecting or recommending a particular investment option; or
(2) receiving a commission or other remuneration.