Securities and Business Investments Division
Securities Bulletin
Vol. XI No. 2	June 1997

  Features:

• A Word from the Banking Commissioner
• Commissioner Explains State Impact of the National Securities Markets Improvement Act of 1996 on Investment Advisers
• Order Governing Connecticut Branch Offices of Federally Covered Advisers
• Quarterly Statistical Summary

Enforcement Highlights:

• Cease and Desist Order
• Stipulation and Agreements
• Licensing Actions

Contributors:

Ralph Lambiase, Division Director

Cynthia Antanaitis, Assistant Director and Bulletin Editor

Eric Wilder, Assistant Director

Helen Crane, Subscription Coordinator

A WORD FROM THE BANKING COMMISSIONER

Save this date: Securities Forum '97 will be held on Monday, October 6, 1997 at the Radisson Hotel and Conference Center in Cromwell, Connecticut. The department's ninth annual seminar will offer an outstanding full day's agenda with morning and afternoon breakout panels and a general session, including prominent speakers and a luncheon. Visit the Department of Banking's web site later this summer for a complete program agenda and registration information.

Effective July 8, 1997, investment advisers are no longer registered at both thes state and federal levels. As a result of the National Securities Markets Improvement Act of 1996, some advisers will be subject to exclusive Securitie and Exchange Commission oversight and some advisers will only be subject to state oversight. Connecticut registered investment advisers and agents are encouraged to read a new department policy statement covering state filing requirements that is included in this Bulletin beginning on page 2. In addition, this issue of the Securities Bulletin features an Order by the Banking Commissioner addressing the applicability of state branch office registration requirements to Federally Covered Advisers.

Earlier this year, the Securities Division participated in a broker dealer sweep with twelve other states. The sweep targeted firms using very aggressive sales tactics to sell small or micro cap securities to generally unsophisticated investors. Subsequently, the department filed several actions that are summarized in this Bulletin. While we recognize that firms engaging in violative conduct are a minority within the industry, we are concerned that such firms' behavior may tarnish the entire industry's reputation.

For example, in one instance, division staff investigated 60 cold callers, each making 250 calls a day from one branch office. Together, these cold callers were generating upwards of 15,000 daily calls using very aggressive and often misleading sales pitches. Equally troubling was the substantial abuse of branch franchising as a means of avoiding licensing requirements. Without meaningful supervision, such branches virtually operate as unsupervised independent broker dealers.

At one particular firm, Division staff also found a majority of the firm's agents were using the designation "Senior Vice President" without regard to actual experience. Moreover, in some cases, agents automatically received the designation within six months following their entry into the securities business. Self-regulatory organizations may wish to consider the adoption of guidelines addressing when the use of such titles is appropriate and not used in a manner so as to mislead the public.

At a time when some have called for less securities regulation, these actions highlight real problems that are occurring in the marketplace and demonstrate the proactive way state securities regulators can effectively work together to protect local investors.

NOTICE

Impact Of The National Securities Markets Improvements Act of 1996
On Investment Advisers

Public Law 104-290, The National Securities Markets Improvement Act of 1996 ("NSMIA"), recently enacted by Congress, dramatically changes the way investment advisers are regulated.

Effective July 8, 1997, and as a result of NSMIA, some advisers will be subject to exclusive Securities and Exchange Commission ("SEC") oversight ("Federally Covered Advisers") and some advisers will only be subject to state oversight. Congress has preempted the states from requiring Federally Covered Advisers to comply with state licensing procedures.

As a general rule, the following Federally Covered Advisers fall within the jurisdiction of the SEC: 1) advisers with $30 million or more in assets under management; 2) advisers to SEC-registered investment companies; 3) advisers excepted from the federal definition in Section 202(a)(11) of the Investment Advisers Act of 1940; 4) nationally recognized statistical rating organizations; 5) pension consultants; 6) affiliates of SEC-registered advisers sharing the same principal office and place of business; 7) advisers which expect to be eligible for federal registration within 90 days; and 8) advisers not regulated or required to be regulated in the state where they have their principal office and place of business.

In Release Number IA-1633, the SEC stated that all investment advisers who are registered with the SEC on July 8, 1997 must file a completed Form ADV-T with the federal government. The purpose of Form ADV-T is to notify the SEC whether the adviser remains eligible for federal registration.

Connecticut legislation has been enacted (P.A. 97-220, effective July 1, 1997) which makes the Connecticut Uniform Securities Act conform to NSMIA.

FILING REQUIREMENTS AS OF JULY 8, 1997 FOR INVESTMENT ADVISERS CURRENTLY REGISTERED IN CONNECTICUT

Connecticut registered investment advisers who are not registered with the SEC on July 8, 1997 and who would not fall within the SEC’s jurisdiction following NSMIA need not make any special filing with the state. Such advisers would remain Connecticut-registered and subject to the Connecticut Uniform Securities Act and its regulations.

Connecticut-registered advisers registered with the SEC on July 8, 1997 are encouraged to file with this department a copy of Form ADV-T as filed with the SEC, together with any related attachments, exhibits and other information filed with Form ADV-T.

If Form ADV-T reveals that the investment adviser is not subject to SEC regulation, the adviser’s Connecticut registration will remain in effect unless the registrant voluntarily requests withdrawal or administrative proceedings are initiated by the department against the registrant.

For Federally Covered Advisers, Section 307 of NSMIA permits the states to require "the filing of any documents filed with the ... [SEC] pursuant to the securities laws solely for notice purposes, together with a consent to service of process and any required fee." If the Form ADV-T filed with this department reveals that the adviser is a Federally Covered Adviser, its state registration will be automatically converted to a notice filing by operation of law. No additional fees will be required for calendar year 1997 nor would the Federally Covered Adviser be required to separately withdraw its registration. The converted notice filing will remain in effect until December 31, 1997.

FILING REQUIREMENTS AFTER JULY 8, 1997

A non-federally covered investment adviser proposing to transact business in Connecticut after July 8, 1997 remains subject to the registration requirements under the Connecticut Uniform Securities Act.

Under P.A. 97-220, Federally Covered Advisers wishing to transact business in the state qualify for a state exemption from registration as long as a notice filing is made with the Commissioner. The notice is valid until December 31st of the calendar year in which it is first filed, and is renewable annually. The initial notice fee is $250, and the renewal fee is $150. The initial notice filing should include an executed Form ADV with all schedules as filed with the SEC, including new Schedule I (Schedule for Declaring Eligibility for SEC Registration). Federally Covered Advisers transacting business in Connecticut should also update their Connecticut notice filing at the same time and in the same form as updates are made to their federal registration if the amendments affect the investment adviser’s operations in this state (e.g., name or address change; change in contact person). To renew a notice filing, Federally Covered Advisers should submit an executed page 1 of Form ADV, together with the most recent Schedule I and the $150 renewal fee. Renewal notice filings expire on December 31st of the calendar year in which they are filed.

REGULATION OF INVESTMENT ADVISER AGENTS

Section 36b-3(11) of the Connecticut Uniform Securities Act ("CUSA"), as amended by P.A. 97-220, defines the term "investment adviser agent" to include "any individual, other than an investment adviser, or a sole proprietor of an investment adviser, employed, appointed or authorized by an investment adviser to solicit business from any person for such investment adviser, within or from this state, and who receives compensation or other remuneration, directly or indirectly, for such solicitation."

Investment adviser agents under Connecticut law essentially are paid solicitors. Where the investment adviser remains subject to state oversight following NSMIA, there is no change in Connecticut investment adviser agent registration requirements, regardless of where the investment adviser or the investment adviser agent is based.

Where, however, the investment adviser is regulated by the SEC, the interplay between the state definition of "investment adviser agent" and the federal approach, as articulated by the SEC in Release No. IA-1633, must be addressed.

Under the federal approach, NSMIA prohibits the states from regulating "supervised persons" of Federally Covered Advisers. Section 202(a)(25) of the Investment Advisers Act of 1940, as amended by NSMIA, defines "supervised person" as "any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of an investment adviser, or other person who provides investment advice on behalf of the investment adviser and is subject to the supervision and control of the investment adviser." The SEC has stated that solicitors can be supervised persons in two instances: (1) They are partners, officers, directors or employees of a Federally Covered Adviser, regardless of whether they give advice; or (2) they give investment advice on behalf of a Federally Covered Adviser and they are subject to the adviser’s supervision and control.

Under NSMIA, even if an individual is a "supervised person", the state may continue to require that he or she be licensed or registered if he or she has an in-state place of business. This subset of "supervised persons" is called "investment adviser representatives" for federal purposes. To be an "investment adviser representative", an individual must meet the criteria in SEC Rule 203A-3(a)(1). This department will not opine on whether any individual qualifies as an "investment adviser representative" for federal purposes. However, it should be noted that if a "supervised person" otherwise qualifies as an "investment adviser representative", has an in-state place of business and engages in compensated solicitation activity, that individual would have to be registered as an investment adviser agent under Connecticut’s securities laws.

The SEC has also made it clear that states may register solicitors who are not supervised persons (e.g. third party solicitors). Such persons remain subject to Connecticut investment adviser agent registration requirements, regardless of where they are based. In addition, the SEC has indicated that solicitors soliciting for both Federally Covered Advisers and state regulated advisers continue to be subject to state oversight. To become registered as an investment adviser agent under Connecticut law, the applicant must submit a Form U-4, pay a $50 registration fee and pass either the Series 65 or the Series 66 examination. The annual renewal fee for investment adviser agents is also $50. All investment adviser agent registrations expire on December 31st unless renewed.

Federally Covered Advisers wishing to withdraw multiple investment adviser agent registrations should submit to the department a listing of all individuals no longer eligible for state registration, including the Social Security number or CRD number for each such individual. Separate termination notices on Form U-5 need not be filed.

BRANCH OFFICE REGISTRATION, SUPERVISORY REQUIREMENTS AND RECORD KEEPING OBLIGATIONS FOR FEDERALLY COVERED INVESTMENT ADVISERS

On July 25, 1997, the Banking Commissioner issued an Order governing Connecticut branch offices of Federally Covered Advisers as well as related supervisory and record keeping issues.

The Order states the term "branch office" as defined in Section 36b-3(4) of CUSA does not include a Connecticut office of a Federally Covered Adviser so as to require registration of the branch office under Section 36b-6(d) of CUSA and adherence to the client and agency notification requirements in subsections (f), (g) and (h) of Section 36b-6 of CUSA if (1) The Federally Covered Adviser files a notice on Schedule E of Form ADV identifying the Connecticut location from which its operations will be conducted, together with a nonrefundable fee of $100 per office as prescribed by Section 36b-6(d) of CUSA; and (2) where the Federally Covered Adviser acquires a branch office of another broker-dealer or investment adviser in Connecticut or relocates a branch office in this state, the Federally Covered Adviser files a notice, consisting of an amendment to Schedule E of Form ADV, reflecting that fact and includes with the notice the nonrefundable fee of $100 required by Section 36b-6(d) of CUSA.

The Order further clarifies that Federally Covered Advisers exempt from registration under Section 36b-6(e) of CUSA, as amended by P.A. 97-220, are not subject to the supervision requirements contained in Section 36b-31-6f of the Regulations under CUSA or the record keeping requirements in Section 36b-31-14b of the Regulations.

The Order indicates, however, that it does not prohibit any Federally Covered Adviser from voluntarily pursuing branch office registration or electing to observe the notice requirements in Section 36b-6 of CUSA.

Registrants and others are encouraged to contact this department if they have any questions concerning compliance with state law.

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Order Governing Connecticut Branch Offices
Of Federally Covered Investment Advisers

WHEREAS the Commissioner of Banking (the "Commissioner" is charged with the administration of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act ("CUSA"), as amended by P.A. 97-220, and Sections 36b-31-2 et seq. of the Regulations of Connecticut State Agencies promulgated under CUSA (the "Regulations");

WHEREAS Section 36b-31(a) of CUSA provides, in part, that: "The commissioner may from time to time make, amend and rescind such ... forms and orders as are necessary to carry out the provisions of sections 36b-2 to 36b-33, inclusive, including ... forms and orders governing ... 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 ... forms and orders, the commissioner may classify securities, persons and matters within his jurisdiction, and prescribe different requirements for different classes;

WHEREAS the Commissioner finds that the issuance of this Order and the prescribing of forms described herein is necessary or appropriate in the public interest and consistent with the purposes fairly intended by the policy and provisions of CUSA;

WHEREAS subsections (d), (f), (g) and (h) of Section 36b-6 of CUSA (1) prohibit any investment adviser from transacting business from any Connecticut place of business unless that place of business is registered as a branch office under the Act; and (2) impose certain state and client notification requirements in the event of operational changes affecting the branch office;

WHEREAS Section 36b-3(4) of CUSA, as amended by P.A. 97-220, defines the term "branch office" to mean "any location other than the main office, identified by any means to the public, customers or clients as a location at which ... [an] investment adviser conducts a securities or investment advisory business";

WHEREAS Public Law 104-290, The National Securities Markets Improvement Act of 1996 ("NSMIA"), which was signed by President Clinton on October 11, 1996 and became effective with respect to investment advisers on July 8, 1997, preempted the state registration of certain investment advisers (hereinafter, "Federally Covered Advisers") subject to Securities and Exchange Commission ("SEC") oversight;

WHEREAS, notwithstanding the preemptive provisions of NSMIA, Congress made it clear in Section 307 of NSMIA that states could continue to require the filing of any documents filed with the SEC pursuant to the federal securities laws solely for notice purposes and to collect required fees;

WHEREAS Section 36b-3(4)(B) of CUSA, as amended by P.A. 97-220, excludes from the definition of "branch office" "any other location not within the intent of this subsection as the commissioner may determine";

NOW THEREFORE THE COMMISSIONER ORDERS AS FOLLOWS:

(1)	The term "branch office" as defined in Section 36b-3(4) of CUSA shall not include a Connecticut office of a Federally Covered Adviser so as to require registration pursuant to Section 36b-6(d) of CUSA and adherence to the requirements in subsections (f), (g) and (h) of Section 36b-6 of CUSA if the following conditions are observed:
	(A) The Federally Covered Adviser files a notice on Schedule E of Form ADV identifying the Connecticut location from which its operations will be conducted, together with a nonrefundable fee of $100 per office as prescribed by Section 36b-6(d) of CUSA; and
	(B) In the event the Federally Covered Adviser acquires a branch office of another broker-dealer or investment adviser in Connecticut or relocates a branch office in this state, the Federally Covered Adviser shall file a notice, consisting of an amendment to Schedule E of Form ADV, reflecting that fact and shall include with such notice the nonrefundable fee of $100 required by Section 36b-6(d) of CUSA;
(2)	Federally Covered Advisers exempt from registration under Section 36b-6(e) of CUSA, as amended by P.A. 97-220, are not subject to the supervision requirements contained in Section 36b-31-6f of the Regulations or the record keeping requirements in Section 36b-31-14b of the Regulations;
(3)	Nothing in this Order shall be construed to prohibit a Federally Covered Adviser from voluntarily pursuing branch office registration or electing to observe the notice requirements in Section 36b-6 of CUSA; and
(4)	This Order shall remain in effect until modified, superseded or vacated by the Commissioner or other lawful authority.

So ordered at Hartford, Connecticut this 25th day of July, 1997.

John P. Burke Banking Commissioner

ENFORCEMENT HIGHLIGHTS

ADMINISTRATIVE SANCTIONS

CEASE AND DESIST ORDERS

STIPULATION AND AGREEMENTS

LICENSING ACTIONS

QUARTERLY STATISTICAL SUMMARY

April 1, 1997 through June 30, 1997

Securities Division