PENNSYLVANIA BROKERͲDEALER REGISTRATION PACKET (NONͲFINRA MEMBERS ONLY) American LegalNet, Inc. www.FormsWorkflow.com PENNSYLVANIA SECURITIES COMMISSION 1010 N. Seventh Street Eastgate Office Building, 2nd Floor Harrisburg, PA 17102Ͳ1410 Filing Requirements: 07/01/2007 PENNSYLVANIA BROKERͲDEALER REGISTRATION REQUIREMENTS (NONͲFINRA MEMBER FIRMS ONLY) Contact: Robyn L. Galloway (717)783Ͳ4211 TDD: AT&T Relay Center 1Ͳ800Ͳ654Ͳ5984 Alternate formats of this document may be available on request. Call (717) 787Ͳ1165 or via AT&T Relay Center. This document and additional forms are also available on the Pennsylvania Securities Commission website at “www.psc.state.pa.us”. GENERAL INSTRUCTIONS & FILING REQUIREMENTS: 1. Provide one copy of the Uniform Form BD (as on file with the U.S. Securities and Exchange Commission) with original signatures and original notarizations on the execution page. 2. $500.00 BrokerͲDealer Filing Fee (Checks must be made payable to the “Commonwealth of Pennsylvania.”) 3. Provide the effective date of Applicant’s registration with the U.S. Securities and Exchange Commission under Section 15 of the Securities Exchange Act of 1934. Page 1 of 5 American LegalNet, Inc. www.FormsWorkflow.com 4. Do you plan to perform investment advisory activity in Pennsylvania [Affirmative response to Form BD item 10.S.] as part of your brokerͲdealer registration? If the response is negative, submit an undertaking, signed by an officer of the Applicant, stating that the Applicant will not engage in investment advisory activity in Pennsylvania. 5. Transactions with Pennsylvania residents can only be effected by registered agents. This would include all officers and/or principals of the firm acting in the capacity of agents for the firm. Therefore, NONͲFINRA member firms must file the following on behalf of proposed agents directly with the Pennsylvania Securities Commission: a. Complete Form UͲ4 with original manual signatures; b. $117.00 Agent Filing Fee (per agent); c. Passing result of: (1) The Uniform Securities Agent State Law Examination (Series 63); and (2) The appropriate securities examination for representatives (agents) based on “Plan of Business” Both of the above examinations are administered by FINRA. 6. Provide a statement identifying that your firm does not do business with the public in Pennsylvania or a statement identifying that your firm does do business with the public in Pennsylvania and furthermore, identify the types of clients in Pennsylvania, i.e., institutional investors(s), nonͲinstitutional investor(s), or both institutional and non institutional investor(s). Page 2 of 5 American LegalNet, Inc. www.FormsWorkflow.com 7. Provide Applicant’s Minimum Net capital requirements with their SRO or Minimum Net Capital Requirement under SEC Net Capital Rule 15c3Ͳ1, as applicable. 8. Does any individual who represents the firm in effecting purchases or sales of securities in the state receive compensation for such activity? (See attachment for definition of “agent” as defined in Section 102©) of the Pennsylvania Securities Act of 1972). If your response is in the affirmative, registration as an agent is required unless the agent meets the requirements of the exemption contained in 64 Pa. Code §302.064 summarized below: a. The agent’s only customers are brokerͲdealers which are registered either with the U.S. Securities and Exchange Commission or registered with the Pennsylvania Securities Commission (“PSC”), and b. The agent is not subject to a currently effective order of the PSC denying, suspending or revoking registration or any other order of the Commission barring the individual from any form of relationship with a registered brokerͲdealer, investment adviser, or agent. c. The agent is representing a brokerͲdealer which is a member of a National securities exchange registered with the SEC. If all the above requirements are not met, then see Item 5. Page 3 of 5 American LegalNet, Inc. www.FormsWorkflow.com SUPPLEMENTAL REQUIREMENTS: 9. In the event your filing contains deficiencies, you will receive a letter identifying such deficiencies with a request that appropriate information be filed with this agency within 60 days from receipt of the letter. 10. Where Form BD is required to be amended, file all amended pages in full and circle the number of the item being changed. Each amendment must include a new execution page with original signatures and original notarizations. 11. 64 Pa. Code §303.041(b) (copy enclosed) requires immediate notification if net capital falls below minimum requirements. 12. Registered brokerͲdealers, who desire to withdraw their registrations in Pennsylvania, must file Form BDW directly with this agency. 13. The annual renewal date is December 31 of each year. All NonͲFINRA member firms will receive a renewal application which must be returned to the Pennsylvania Securities Commission with the appropriate renewal fees. Page 4 of 5 American LegalNet, Inc. www.FormsWorkflow.com ENCLOSURES: Pa. Securities Act of 1972 Section 102(c). Section 102(e). Section 301. Section 302. Definition of Agent Definition of BrokerͲDealer Registration Requirement Exemptions 64 Pa. Code §303.011 §303.013 §303.031 §303.041 §304.011 §304.021 §305.019 §604.020 BrokerͲDealer registration procedures Agent registration procedures Examination requirement for agents BrokerͲDealer capital requirements BrokerͲDealer required records BrokerͲDealer required financial reports Dishonest and unethical practices BrokerͲdealers, investment advisers, brokerͲdealer agents and investment adviser representatives using the Internet for general dissemination of information on products and services Ͳ statement of policy Commission Positions BrokerͲDealer responsibility to ascertain registration status of investment advisers referred to clients under wrap fee arrangements Registration of Financial Planners MISCELLANEOUS Pennsylvania Securities Commission Publication Order Form Page 5 of 5 American LegalNet, Inc. www.FormsWorkflow.com SECTION 102(c) OF THE PENNSYLVANIA SECURITIES ACT OF 1972 (c) "Agent" means any individual, other than a broker-dealer, who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. "Agent" does not include: (i) an individual who represents an issuer in effecting transactions in securities exempted by section 202, transactions exempted by section 203 or transactions in a covered security described in sections 18(b)(3) and (4)(D) of the Securities Act of 1933 (48 Stat. 74, 15 U.S.C. § 77r), if no compensation is paid or given directly or indirectly for soliciting any person in this State in connection with any of the foregoing transactions; (ii) an individual who represents a broker-dealer in effecting transactions in this State which transactions are limited to those described in section 15(h)(2) of the Securities Exchange Act of 1934 (48 Stat. 881, 15 U.S.C. § 78o(h)(2)); and (iii) an individual who has no place of business in this State if he effects transactions in this State exclusively with broker-dealers. Except where representing an issuer in effecting transactions in securities registered under section 205 or 206, a bona fide officer, director, or partner or employe of a broker-dealer or issuer, or an individual occupying a similar status or performing similar functions, is an agent only if he otherwise comes within this definition and receives compensation directly or indirectly related to purchases or sales of securities. American LegalNet, Inc. www.FormsWorkflow.com SECTION 102(e) OF THE PENNSYLVANIA SECURITIES ACT OF 1972 (e) "Broker-dealer" means any person engaged in the business of effecting transactions in securities for the account of others or for his own account. "Broker-dealer" does not include: (i) An agent; (ii) An issuer; (iii) A bank, when effecting transactions for its own account or for the account of another under section 302(c); (iv) An executor, administrator, guardian, conservator or pledgee; (v) A person who has no place of business in this State if he effects transactions in this State exclusively with or through (A) the issuers of the securities involved in the transactions, (B) brokerdealers or institutional investors; (vi) A person licensed as a real estate broker or agent under the Real Estate Brokers License Act of one thousand nine hundred and twenty-nine, act of May 1, 1929 (P.L.1216), as amended, and whose transactions in securities are isolated transactions incidental to that business; or (vii) Other persons not within the intent of this subsection whom the commission by regulation designates. American LegalNet, Inc. www.FormsWorkflow.com SECTION 301 OF THE PENNSYLVANIA SECURITIES ACT OF 1972 (a) It is unlawful for any person to transact business in this State as a broker-dealer or agent unless he is registered under this act. (b) It is unlawful for any broker-dealer or issuer to employ an agent to represent him in this State unless the agent is registered under this act. The registration of an agent is not effective during any period when he is not associated with a specified broker-dealer registered under this act or a specified issuer. No agent shall at any time represent more than one broker-dealer or issuer, except that where affiliated organizations are registered broker-dealers, an agent may represent one or more of such organizations. When an agent begins or terminates a connection with a broker-dealer or issuer, or begins or terminates those activities which make him an agent, the agent as well as the broker-dealer or issuer shall promptly notify the commission. The commission may adopt a temporary registration procedure to permit agents to change employers without suspension of their registrations hereunder. (c) It is unlawful for any person to transact business in this State as an investment adviser unless he is so registered or registered as a broker-dealer under this act or unless he is exempted from registration. It is unlawful for any person to transact business in this State as an investment adviser representative unless he is so registered or exempted from registration. (c.1) The following apply: (1) It is unlawful for any: (i) person required to be registered as an investment adviser under this act to employ an investment adviser representative unless the investment adviser representative is registered under this act or exempted from registration, provided that the registration of an investment adviser representative is not effective during any period when he is not employed by an investment adviser registered under this act; or (ii) federally covered adviser to employ, supervise or associate with an investment adviser representative having a place of business in this Commonwealth, unless such investment adviser representative is registered under this act or exempted from registration. (2) If a registered investment adviser representative begins or terminates employment with an investment adviser or a federally covered adviser, the investment adviser in the case under paragraph (1)(i), or the investment adviser representative in the case of paragraph (1)(ii), shall promptly notify the commission. American LegalNet, Inc. www.FormsWorkflow.com (3) The commission may adopt a temporary registration procedure to permit investment adviser representatives to change employers without suspension of their registrations under this act. (d) It is unlawful for any licensed broker-dealer, agent or investment adviser to effect a transaction in securities, directly or indirectly, in this State if the registrant is in violation of this act, or any regulation or order promulgated under this act of which he has notice, if such violation (i) is a material violation; (ii) relates to transactions effected in this State; and (iii) has been committed by such registrant, or if the information contained in his application for registration, as of the date of such transaction, is incomplete in any material respect or is false or misleading with respect to any material fact. (e) Every registration or notice filing expires on December 31 of each year unless renewed. No registration or notice filing is effective after its expiration, unless a renewal application has been timely filed, and expiration of a registration for which no renewal application has been filed is deemed an application for withdrawal under section 305(f). (f) It is unlawful for any federally covered adviser to conduct advisory business in this State, unless such person complies with the provisions of section 303(a)(iii). American LegalNet, Inc. www.FormsWorkflow.com SECTION 302 OF THE PENNSYLVANIA SECURITIES ACT OF 1972 Section 302. Exemptions.--The following persons shall be exempted from the registration provisions of section 301: (a) A broker-dealer registered under the Securities Exchange Act of 1934, who has not previously had any certificate denied or revoked under this act or any predecessor statute, if he has no place of business in this State and, during any period of twelve consecutive months, he does not direct offers to sell or buy into this State in any manner to persons other than broker-dealers, institutional investors or governmental agencies and other instrumentalities designated by regulation of the commission, or to more than five other customers in this State, whether or not the offeror or any of the offerees is then present in this State. (b) An agent in so far as he effects transactions on behalf of a broker-dealer who is exempted by the provisions of subsection (a). (c) A bank not registered as a broker-dealer under this act executing orders for the purchase or sale of securities for the account of the purchaser or seller thereof. (d) An investment adviser who does not have a place of business in this State and during the preceding twelve-month period has had not more than five clients who are residents of this State exclusive of other investment advisers, federally covered advisers, broker-dealers or institutional investors. (d.1) An investment adviser representative who is employed by or associated with an investment adviser insofar as he transacts business in this State on behalf of an investment adviser who is exempted by the provisions of subsection (d). (d.2) An investment adviser representative who has a place of business in this State and is employed by or associated with a federally covered adviser and the federally covered adviser meets any of the criteria described in section 303(a)(iii)(A), (B) or (C). (e) Any person who represents an issuer in effecting transactions in: (1) securities that are exempted by section 202(e), (f) or (g); (2) securities involved in a transaction exempted by section 203(c), (g), (k), (l) or (m); or (3) securities which are covered securities under section 18(b)(1) of the Securities Act of 1933 (48 Stat. 74, 15 U.S.C. 77r(b)(1)). American LegalNet, Inc. www.FormsWorkflow.com (e.1) Any person who represents an issuer in effecting transactions in securities registered under section 205 or 206 who: (1) is a bona fide officer, director, partner or employe of the issuer or an individual occupying similar status or performing similar functions; and (2) does not receive any compensation, directly or indirectly, for effecting the transactions. (f) The commission may by such regulations as it deems necessary or appropriate in the public interest or for the protection of investors, either unconditionally or upon specified terms and conditions or for specified periods, exempt from the provisions of section 301 any class of persons specified in such regulations. American LegalNet, Inc. www.FormsWorkflow.com §303.011. Broker-dealer registration procedures. (a) An application for initial registration as a broker-dealer shall contain the information requested in and shall be made on Uniform Application for Broker-Dealer Registration (Form BD), or a successor form, and shall be made in the following manner: (1) An applicant which is not a member of the National Association of Securities Dealers, Inc. (NASD) or a member of a National securities exchange registered with the United States Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (15 U.S.C.A. §§78a – 78kk) shall complete and file one copy of Form BD with the Commission accompanied by the requisite filing fee required by section 602(d.1) of the act (70 P.S. §1-602(d.1)), the compliance assessment required by section 602.1(a)(3) of the act (70 P.S. §1-602.1(a)(3)), and financial statements in the form required by subsections (b) and (c). (2) An applicant which is not a member of the NASD but is a member of a National securities exchange registered with the SEC under the Securities Exchange Act of 1934 shall complete and file one copy of Form BD with the Commission accompanied by the requisite filing fee required by section 602(d.1) of the act and the compliance assessment required by section 602.1(a)(3) of the act. (3) An applicant which is a member of NASD shall file Form BD in the manner set forth in §603.011(f) (relating to filing requirements) accompanied by the filing fee required by section 602(d.1) of the act and the compliance assessment required by section 602.1(a)(3) of the act. (b) Except for applicants described in subsections (a)(2) and (3), every application shall be accompanied by a statement of the financial condition of the applicant prepared in accordance with generally accepted accounting principles and accompanied by an auditor’s report containing an unqualified opinion of an independent certified public accountant. The audited statement of financial condition shall be as of the end of the applicant’s fiscal year, or the preceding fiscal year if the statement of financial condition for the most recently ended fiscal year is unavailable and if the application is filed within 14 months of the end of the preceding fiscal year. If the date of the most recent audited statement of financial condition is more than 45 days prior to the date of filing, the applicant also shall file an unaudited statement of financial condition as of a date within 45 days of the date of filing. As part of the statement, the Commission may require the filing of separate schedules: (1) Listing the securities owned by the applicant valued at market. (2) Stating material contractual commitments of the applicant not otherwise reflected in the statements. (c) Except for applicants described in subsections (a)(2) and (3), an applicant that has commenced to act as a broker-dealer, the audited statement of financial condition shall be accompanied by an audited statement of income as of the end of the applicant’s most recent fiscal year, or the preceding fiscal year if the statement of income for the most recently ended fiscal year is unavailable and if the application is filed within 14 months of the end of the preceding fiscal year. (d) An applicant described in subsection (a)(2) or (3) shall provide the Commission, within five days of receipt of a written or electronic request, a copy of any financial statement or financial information required by SEC rules or the rules of a National securities association or National securities exchange registered with the SEC of which the applicant is a member. (e) A broker-dealer registered under the act shall take steps necessary to ensure that material information contained in its Form BD remains current and accurate. If a material statement made in Form BD becomes incorrect or inaccurate, the broker-dealer shall file with the Commission an amendment on Form BD within 30 days of the occurrence of the event which required the filing of the amendment. American LegalNet, Inc. www.FormsWorkflow.com §303.013. Agent registration procedures. (a) An application for initial registration as an agent of a broker-dealer or issuer shall contain the information requested in and shall be made on Uniform Application for Securities Industry Registration or Transfer (Form U-4) or a successor form. Except as provided in subsection (b), the agent and the broker-dealer or issuer shall complete and file with the Commission one copy of Form U-4 and exhibits thereto accompanied by the filing fee required by section 602(d.1) of the act (70 P.S. § 1602(d.1)), the compliance assessment required by section 602.1(a)(1) of the act (70 P.S. § 1-602.1(a)(1)) and evidence of passage of the examinations required by §303.031 (relating to examination requirements for agents). (b) An applicant for registration as a agent of a broker-dealer which is a member firm of the National Association of Securities Dealers (NASD) shall file the following items in the manner set forth in § 603.011(f) (relating to filing requirements): (1) A completed and executed Form U-4 and exhibits thereto. (2) The filing fee required by section 602(d.1) of the act. (3) The compliance assessment required by section 602.1(a)(1) of the act. (4) Evidence of passage of the examinations required by §303.031. (c) An agent and broker-dealer or issuer shall take necessary steps to ensure that material information contained in Form U-4 remains current and accurate. If a material statement made in the Form U-4 becomes incorrect or inaccurate, the agent and broker-dealer or issuer shall file with the Commission an amendment to Form U-4 within 30 days of the occurrence of the event which requires the filing of the amendment. American LegalNet, Inc. www.FormsWorkflow.com §303.031. Examination requirement for agents. (a) An individual may not be registered as an agent under the act unless the individual has met the requirements of subsections (b) and (c): (b) The applicant has received a passing grade on the securities examination for principals or registered representatives administered by the National Association of Securities Dealers, Inc. (NASD), the New York Stock Exchange or the United States Securities and Exchange Commission within 2 years prior to the date of filing an application for registration. An applicant will be deemed to have met the requirements of this subsection if any of the following apply: (i) The applicant previously has passed the examination and has not had a lapse in employment with a broker-dealer for a period exceeding 2 years. (ii) The applicant has received a waiver of the examination requirement by the NASD. (iii) The applicant has received a Commission order waiving the examination requirement. (c) The applicant has received a passing grade on the Uniform Securities Agent State Law Examination (Series 63) or, alternatively, the Uniform Combined State Law Examination (Series 66) and the General Securities Representative Examination (Series 7) or successor examination administered by the NASD within 2 years prior to the date of filing an application for registration. An applicant will be deemed to have met the requirements of this subsection if any of the following apply: (i) The applicant previously has passed the Series 63 or, alternatively, the Series 66 and Series 7, and has not had a lapse in employment with a broker-dealer for a period exceeding 2 years. (ii) The applicant has received a Commission order waiving the requirement to take the Series 63 or, alternatively, the Series 66 and Series 7. American LegalNet, Inc. www.FormsWorkflow.com §303.041. Broker-dealer capital requirements. (a) Except as set forth in subsection (e), every broker-dealer registered under section 301 of the act (70 P.S. §1-301) shall maintain net capital of $25,000. The aggregate indebtedness of a registered broker-dealer may not exceed 1500% of its net capital. For purposes of this section, the terms “net capital” and “aggregated indebtedness” have the meanings set forth in Rule 15c3-1 (17 CFR 240.15c3-1) (relating to net capital requirements for brokers and dealers) promulgated under the Securities Exchange Act of 1934 (15 U.S.C.A. §§78a - 78kk). (b) As a condition of the right to continue to transact business, every broker-dealer registered under the act that is not registered as a broker-dealer with the United States Securities and Exchange Commission (SEC) under the Securities Exchange Act (15 U.S.C.A. §§78a – 78kk) immediately shall notify the Commission if the broker-dealer’s aggregate indebtedness exceeds 1500% of its net capital or if its total net capital is less than the minimum required. Within 24 hours after transmitting the notice, the broker-dealer shall file a report of its financial condition with the Commission including the following: (1) A proof of money balances of ledger accounts in the form of a trial balance. (2) A computation of net capital and aggregate indebtedness as those terms are used in this section and a computation of the ratio of aggregate indebtedness to net capital. (3) An analysis of the aggregate market value of fully paid securities in customers’ security accounts which are not segregated. (4) A proof of ledger net credit balances of monies borrowed from banks, trust companies and from other financial institutions, and from others, which are fully or partially secured by securities carried for the account of a customer. (5) A computation of the aggregate amount of customers’ ledger debit balances. (6) A computation of the aggregate amount of customers’ ledger credit balances. (7) A statement as to the approximate number of customer accounts. (c) The term “customer” of a broker-dealer as used in this subsection includes every person except the broker-dealer. (d) The Commission may by order permit an applicant for registration as a broker-dealer under section 301 of the act which is not registered or has not applied for registration as a broker or dealer with the SEC to file, execute and maintain a surety bond in compliance with §303.051 (relating to surety bonds). (e) Every broker-dealer registered under Section 301 of the act that is registered as a broker or dealer with the SEC shall maintain a minimum net capital and comply with the aggregate indebtedness requirements as set forth in Rule 15c3-1 (17 CFR §240.15c3-1)(relating to net capital requirements for brokers and dealers) promulgated under the Securities Exchange Act of 1934. American LegalNet, Inc. www.FormsWorkflow.com §304.011. Broker-dealer required records. (a) Every broker-dealer registered under section 301 of the act (70 P.S. §1-301) shall make and keep the records required to be maintained as described in Rule 17a-3 (17 CFR 240.17a-3) (relating to records to be made by certain exchange members, brokers and dealers) adopted under the Securities Exchange Act of 1934 (15 U.S.C.A. §§78a – 78kk). (b) A broker-dealer registered under the act that is not registered as a broker or dealer with the United States Securities and Exchange Commission (SEC) immediately shall notify the Commission if the broker-dealer fails to make and keep current the books and records required by this section. Within 24 hours after filing the notice with the Commission, the broker-dealer shall file with the Commission a report stating what steps have been taken and are being taken to fully comply with this section. (c) Every broker-dealer registered under the act shall make, keep and preserve either a separate file of written complaints of customers and actions taken by the broker-dealer in response thereto, or a separate record of the complaints and a clear reference to the files containing the correspondence connected with the complaint maintained by the broker-dealer. A “complaint” shall be deemed to include a written statement of a customer or a person acting on behalf of a customer or a written notation of verbal communication alleging a grievance involving the purchase or sale of securities, the solicitation or execution of a transaction or the disposition of securities or funds of the customer. A registered broker-dealer that also is registered as a broker or dealer with the SEC shall be deemed to be in compliance with the requirements of this subsection if it maintains records of customer complaints as prescribed by applicable SEC rules. (d) The records required to be maintained under this section shall be retained and preserved for the period of time designated in Rule 17a-4 (17 CFR §240.17a-4) (relating to records to be preserved by certain exchange members, brokers and dealers) promulgated under the Securities Exchange Act of 1934 (15 U.S.C.A. §§78a – 78kk) and made easily accessible for inspection by the Commission or its representatives. The retention and preservation of records as required in this section may be upon microfilm, microfiche, or any similar medium; electronic or digital storage medium; computer disks or tapes or other similar recording process if adequate facilities are maintained for the examination of the facsimiles and if enlargements or paper copies of the facsimiles can be provided promptly upon reasonable request of the Commission or its representatives. American LegalNet, Inc. www.FormsWorkflow.com §304.021. Broker-dealer required financial reports. (a) Every broker-dealer registered under the act which is not registered as a broker or dealer with the United States Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (15 U.S.C.A. §§78a – 78kk) shall file annually with the Commission a report consisting of a statement of financial condition as of the end of its fiscal year and an income statement for the year then ended. (b) The annual report of financial condition filed under this section shall be prepared in accordance with generally accepted accounting principles and accompanied by an auditor’s report containing an unqualified opinion of an independent certified public accountant. The accountant shall submit as a supplementary opinion comments, based upon the audit, as to material inadequacies to exist in the accounting system, the internal accounting controls and procedures taken for safeguarding securities and shall indicate corrective action taken or proposed. (c) A broker-dealer registered under the act which also is registered as a broker or dealer with the SEC shall provide the Commission, within five days of receipt of a written or electronic request, a copy of any financial statement, financial report or other financial information required by SEC rules or the rules of a National securities association or National securities exchange registered with the SEC of which the applicant is a member. (d) The report required by this section shall be filed within 120 days following the end of the broker-dealer’s fiscal year. American LegalNet, Inc. www.FormsWorkflow.com 64 Pa. Code §305.019 Dishonest and unethical practices. (a) Every person registered under Section 301 of the act (70 P.S. §1-301) is a fiduciary and has a duty to act primarily for the benefit of its customers. Further, these persons shall observe high standards of commercial honor and just and equitable principals of trade in the conduct of their business. (b) Under section 305(a)(ix) of the act (70 P.S. § 1-305(a)(ix)), the Commission may deny, suspend or revoke a broker-dealer, agent, investment adviser or associated person registration or censure a broker-dealer, agent, investment adviser or associated person registrant if that person or an affiliate thereof has engaged in dishonest or unethical practices in the securities business or has taken unfair advantage of a customer. (c) The Commission, for purposes of issuing an order under section 305(a)(ix) of the act, will consider the actions in paragraphs (1) - (3) to constitute dishonest or unethical practices in the securities business or taking unfair advantage of a customer. The conduct described in paragraphs (1) -(3) is not exclusive. Engaging in other conduct inconsistent with standards in subsection (a), such as forgery, embezzlement, nondisclosure, incomplete disclosure or misstatement of material facts, or manipulative or deceptive practices or taking unfair advantage of a customer or former customer in any aspect of a tender offer also constitute grounds for denial, suspension or revocation of a broker-dealer, agent, investment adviser or associated person registration. (1) Broker-dealers. Includes the following actions: (i) Engaging in a pattern of unreasonable and unjustifiable delays in the delivery of securities purchased by any of its customers or in the payment upon request of free credit balances reflecting completed transactions of any of its customers. (ii) Inducing trading in a customer's account which is excessive in size or frequency in view of the financial resources and character of the account. (iii) Recommending to a customer the purchase, sale or exchange of a security without reasonable grounds to believe that the transaction or recommendation is suitable for the customer based upon reasonable inquiry concerning the customer's investment objectives, financial situation and needs and other relevant information known by the broker-dealer. (iv) Executing a transaction on behalf of a customer without authorization to do so. (v) Exercising discretionary power in effecting a transaction for a customer's account without first obtaining written discretionary authority from the customer, unless the discretionary power relates solely to the time or price, or both, for the execution of orders. (vi) Executing a transaction in a margin account without securing from the customer a properly executed written margin agreement promptly after the initial transaction in the account. (vii) Failing to segregate customers' free securities or securities held in safekeeping. (viii) Hypothecating a customer's securities without having a lien thereon unless the broker-dealer secures from the customer a properly executed written consent promptly after the initial transaction, except as permitted by rules of the Securities and Exchange Commission. (ix) Entering into a transaction with or for a customer at a price not reasonably related to the current market price of the security or receiving an unreasonable commission or profit. (x) Failing to furnish to a customer purchasing securities in an offering, no later than the date of confirmation of the transaction, either a final prospectus or a preliminary prospectus and an additional document, which together include information set forth in the final prospectus. (xi) Charging unreasonable and inequitable fees for services performed, including miscellaneous services such as collection of monies due for principal, dividends or interest, exchange or transfer of securities, appraisals, safekeeping, or custody of securities and other services related to its securities business. American LegalNet, Inc. www.FormsWorkflow.com (xii) Offering to buy from or sell to a person at a stated price unless the broker-dealer is prepared to purchase or sell at a price and under the conditions that are stated at the time of the offer to buy or sell. (xiii) Representing that a security is being offered to a customer "at the market" or a price relevant to the market price unless the broker-dealer knows or has reasonable grounds to believe that a market for the security exists other than that made, created or controlled by the broker-dealer, or by a person for whom he is acting or with whom he is associated in the distribution, or a person controlled by, controlling or under common control with the broker-dealer. (xiv) Effecting a transaction in, or inducing the purchase or sale of, a security by means of a manipulative, deceptive or fraudulent device, practice, plan, program, design or contrivance, which may include: (A) Effecting a transaction in a security which involves no change in the beneficial ownership thereof. (B) Entering an order for the purchase or sale of a security with the knowledge that an order of substantially the same size, at substantially the same time and substantially the same price, for the sale of the security, has been or will be entered by or for the same or different parties for the purpose of creating a false or misleading appearance of active trading in the security or a false or misleading appearance with respect to the market for the security. Nothing in this subsection prohibits a broker-dealer from entering bona fide agency cross transactions for its customers. (C) Effecting, along or with one or more other persons, a series of transactions in a security creating actual or apparent active trading in the security or raising or depressing the price of the security, for the purpose of inducing the purchase or sale of the security by others. (xv) Guaranteeing a customer against loss in a securities account of the customer carried by the broker-dealer or in a securities transaction effected by the broker-dealer with or for the customer. (xvi) Publishing or circulating, or causing to be published or circulated, a notice, circular, advertisement, newspaper article, investment service, or communication of any kind which purports to report a transaction as a purchase or sale of a security unless the broker-dealer believes that the transaction was a bona fide purchase or sale of the security; or which purports to quote the bid price or asked price for a security, unless the broker-dealer believes that the quotation represents a bona fide bid for, or offer of, the security. (xvii) Using advertising or sales presentation in such a fashion as to be deceptive or misleading. An example of this practice would be a distribution of nonfactual data, material or presentation based on conjecture, unfounded or unrealistic claims or assertions in a brochure, flyer, or display by words, pictures, graphs or otherwise designed to supplement, detract from, supersede or defeat the purpose or effect of a prospectus or disclosure. (xviii) Failing to disclose that the broker-dealer is controlled by, controlling, affiliated with or under common control with the issuer of a security before entering into a contract with or for a customer for the purchase or sale of the security, the existence of the control to the customer, and if the disclosure is not made in writing, it shall be supplemented by the giving or sending of written disclosure at or before the completion of the transaction. (xix) Failing to make a bona fide public offering of all of the securities allotted to a broker-dealer for distribution, whether acquired as an underwriter, a selling group member or from a member participating in the distribution as an underwriter or selling group member. (xx) Failure or refusal to furnish a customer, upon reasonable request, information to which he is entitled, or to respond to a formal written request or complaint. (xxi) Failing to comply with an applicable provision of the Rules of Fair Practice of the National Association of Securities Dealers or an applicable fair practice or ethical standard promulgated by the Securities and Exchange Commission or by a self-regulatory organization approved by the Securities and Exchange Commission. (2) Agents. Includes the following actions: (i) Engaging in the practice of lending or borrowing money or securities from a customer, or acting as a custodian for money, securities or an executed stock power of a customer. American LegalNet, Inc. www.FormsWorkflow.com (ii) Effecting securities transactions not recorded on the regular books or records of the brokerdealer which the agent represents, unless the transactions are authorized in writing by the broker-dealer prior to execution of the transaction. (iii) Establishing or maintaining an account containing fictitious information in order to execute transactions which would otherwise be prohibited. (iv) Sharing directly or indirectly in profits or losses in the account of a customer without the written authorization of the customer and the broker-dealer which the agent represents. (v) Dividing or otherwise splitting the agent's commissions, profits or other compensation from the purchase or sale of securities with a person not also registered as an agent for the same broker-dealer, or for a broker-dealer under direct or indirect common control. (vi) (3) Engaging in conduct specified in paragraph (1)(ii)-(vi), (ix), (x), (xiv)-(xvii) and (xxi). Investment advisers. Includes the following actions. (i) Recommending to a client to whom investment supervisory, management or consulting services are provided the purchase, sale or exchange of a security without reasonable grounds to believe that the recommendation is suitable for the client on the basis of information furnished by the client after reasonable inquiry concerning the client's investment objectives, financial situation and needs, and any other information known by the investment adviser. (ii) Exercising discretionary power in placing an order for the purchase or sale of securities for a client without obtaining written discretionary authority from the client within 10 business days after the date of the first transaction placed under oral discretionary authority, unless the discretionary power relates solely to the price at which, or the time when, an order involving a definite amount of a specified security shall be executed, or both. (iii) Inducing trading in a client's account that is excessive in size or frequency in view of the financial resources, investment objectives and character of the account. (iv) Placing an order to purchase or sell a security for the account of a client without authority to do so. (v) Placing an order to purchase or sell a security for the account of a client upon instruction of a third party without first having obtained a written third-party trading authorization from the client. (vi) Borrowing money or securities from a client unless the client is a broker-dealer, an affiliate of the investment adviser, or a financial institution engaged in the business of loaning funds. (vii) Loaning money to a client unless the investment adviser is a financial institution engaged in the business of loaning funds or the client is an affiliate of the investment adviser. (viii) Misrepresenting to an advisory client, or prospective advisory client, the qualifications of the investment adviser or an employe of the investment adviser or misrepresenting the nature of the advisory services being offered or fees to be charged for the service, or to omit to state a material fact necessary to make the statements made regarding qualifications, services or fees, in light of the circumstances under which they are made, not misleading. (ix) Providing a report or recommendation to an advisory client prepared by someone other than the adviser without disclosing that fact. This prohibition does not apply to a situation where the adviser uses published research reports or statistical analyses to render advice or where an adviser orders such a report in the normal course of providing service. (x) Charging a client an unreasonable advisory fee. (xi) Failing to disclose to clients in writing before advice is rendered a material conflict of interest relating to the adviser or its employes which could reasonably be expected to impair the rendering of unbiased and objective advice including: American LegalNet, Inc. www.FormsWorkflow.com (A) Compensation arrangements connected with advisory services to clients which are in addition to compensation from the clients for the services. (B) Charging a client an advisory fee for rendering advice when a commission for executing securities transactions pursuant to the advice will be received by the adviser or its employes. (xii) Guaranteeing a client that a specific result will be achieved - gain or no loss - with advice which will be rendered. (xiii) Publishing, circulating or distributing an advertisement which does not comply with Rule 206(4)-1 under the Investment Advisers Act of 1940 (15 U.S.C. §§80b-1 - 80b-21). (xiv) unless consented to by the client. Disclosing the identity, affairs or investments of a client unless required by law to do so, or (xv) Taking an action, directly or indirectly, with respect to those securities or funds in which a client has a beneficial interest, where the investment adviser has custody or possession of the securities or funds when the adviser's action is subject to and does not comply with the requirements of Rule 206(4)-2 under the Investment Advisers Act of 1940. (xvi) Entering into, extending or renewing an investment advisory contract unless the contract is in writing and discloses, in substance, the services to be provided, the term of the contract, the advisory fee, the formula for computing the fee, the amount of a prepaid fee to be returned in the event of contract termination or nonperformance, whether the contract grants discretionary power to the adviser and that no assignment of the contract shall be made by the investment adviser without the consent of the other party to the contract. American LegalNet, Inc. www.FormsWorkflow.com 64 Pa. Code §604.020. Broker-dealers, investment advisers, broker-dealer agents and investment adviser representatives using the Internet for general dissemination of information on products and services - statement of policy (a) Section 301(a) of the act (70 P.S. §1-301(a)) provides that "[i]t is unlawful for any person to transact business in this State as a broker-dealer or agent unless he is registered under this act." (b) Section 301(c) of the act provides that "[i]t is unlawful for any person to transact business in this State as an investment adviser unless he is so registered or registered as a broker-dealer under this act or unless he is exempted . . . " Section 301(c) further provides that: [i]t is unlawful for any person to transact business in this State as an associated person unless he is so registered or exempted from registration . . . " (c) The Commission acknowledges that the Internet, the World Wide Web, and similar proprietary or common carrier electronic systems (collectively, the "Internet") have facilitated greatly the ability of brokerdealers, investment advisers, broker-dealer agents and associated persons of investment advisers to advertise and otherwise disseminate information on products and services to prospective customers and clients. (d) The Commission also acknowledges that certain communications made on the Internet are directed generally to anyone having access to the Internet and may be transmitted through postings on Bulletin Boards, displays on "Home Pages" or similar methods (hereinafter, "Internet Communications"). (e) The Commission further acknowledges that in certain instances, by distributing information on available products and services through Internet Communications available to persons in this Commonwealth, brokerdealers, investment advisers, agents and associated persons, as defined under section 102 of the act (70 P.S. § 1-102), could be construed as "transacting business" for purposes of sections 301(a), and (c) of the act so as to require registration in this Commonwealth under section 301 of the act, since the Internet Communications would be received in this Commonwealth regardless of the intent of the person originating the communication. (f) Broker-dealers, investment advisers, broker-dealer agents (hereinafter BD agents) and associated persons (hereinafter IA reps) who use the Internet to distribute information on available products and services through Internet Communications directed generally to anyone having access to the Internet, will not be deemed to be "transacting business" in this Commonwealth for purposes of sections 301(a) and (c) of the act based solely on that fact if all the following conditions are met: (1) The Internet Communication contains a legend in which it is clearly stated that: (i) The broker-dealer, investment adviser, BD agent or IA rep in question may only transact business in this Commonwealth if first registered, excluded or exempted from State broker-dealer, investment adviser, BD agent or IA rep registration requirements. (ii) Follow-up, individualized responses to persons in this Commonwealth by the broker-dealer, investment adviser, BD agent or IA rep that involve either effecting or attempting to effect transactions in securities, or rendering personalized investment advice for compensation, will not be made absent compliance with State broker-dealer, investment adviser, BD agent or IA rep registration requirements, or an applicable exemption or exclusion. American LegalNet, Inc. www.FormsWorkflow.com (2) The Internet Communication contains a mechanism, including and without limitation, technical "fire walls" or other implemented policies and procedures, designed reasonably to ensure that prior to any subsequent, direct communication with prospective customers or clients in this Commonwealth, the brokerdealer, investment adviser, BD agent or IA rep is first registered in this Commonwealth or qualifies for an exemption or exclusion from the requirement. Nothing in this paragraph relieves a broker-dealer, investment adviser, BD agent or IA rep registered in this Commonwealth from any applicable securities registration requirement in this Commonwealth. (3) The Internet Communication does not involve either effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation in this Commonwealth over the Internet, but is limited to the dissemination of general information on products or services. (4) In the case of a BD agent or IA rep the following apply: (i) The affiliation of the BD agent or IA rep with the broker-dealer or investment adviser is prominently disclosed within the Internet Communication. (ii) The broker-dealer or investment adviser with whom the BD agent or IA rep is associated retains responsibility for reviewing and approving the content of any Internet Communication by a BD agent or IA rep. (iii) The broker-dealer or investment adviser with whom the BD agent or IA rep is associated first authorizes the distribution of information on the particular products and services through the Internet Communication. (iv) In disseminating information through the Internet Communication, the BD agent or IA rep acts within the scope of the authority granted by the broker-dealer or investment adviser. (g) The position expressed in this section extends to broker-dealer, investment adviser, BD agent and IA rep registration requirements within this Commonwealth only, and does not excuse compliance with applicable securities registration, antifraud or related provisions. (h) Nothing in this statement of policy affects the activities of any broker-dealer, investment adviser, BD agent and IA rep engaged in business in this Commonwealth that is not subject to the jurisdiction of the Commission under the National Securities Markets Improvement Act of 1996 (Pub. L. No. 104290, 110 Stat. 3416), which will be codified in various sections of 15 U.S.C. The provisions of this §604.020 adopted July 10, 1998, effective July 11, 1998, 28 Pa.B. 3302. American LegalNet, Inc. www.FormsWorkflow.com PENNSYLVANIA SECURITIES COMMISSION DIVISION OF LICENSING & COMPLIANCE SUBJECT: Broker-dealer responsibility to ascertain registration status o f investment advisers referred to clients under wrap fee arrangements RELEASE NO.: 91-LC-1 DATE OF RELEASE: April 23, 1991 CATEGORY: Staff Position and Staff No-Action Position PRIOR REFERENCE: New Through its compliance examination program, the staff of the Division of Licensing & Compliance has become aware that broker-dealers are offering money management services and/or other investment advisory services to their clients through non-affiliated investment advisers. In a typical program, the broker-dealer pre-screens and selects a group of investment advisers representing various investment philosophies and disciplines and assists the client in selecting the appropriate adviser. Often, the client grants discretionary authority to the broker-dealer to assume all duties with respect to assets held in the account. Thereafter, the broker-dealer oversees and monitors the performance of the investment adviser on behalf of its client and may provide to the client a periodic performance analysis. Account execution services are performed by the broker-dealer. The client pays the broker-dealer a fee, commonly known as a “ wrap fee” , which is based on the assets under management. The fee covers the broker-dealer’ sservices, fees to the investment adviser and all commissions and other charges with respect to transactions. The staff consistently has found that some or all of the investment advisers referred by broker-dealers to their Pennsylvania clients are not registered as investment advisers under Section 301 of the Pennsylvania Securities Act of 1972 (1972 Act). Further, in many cases, no exclusion from the definition of investment adviser or exemption from registration is available.1 1 Several investment advisers and broker-dealers have attempted to rely on the “ de minimus” client exemption set forth in Section 302(d) of the 1972 Act; however, a review of the investment adviser’ s records reveals more than 5 retai l clients in this state and in some cases, the broker-dealer’ s own records discretionary authority agreements and referrals to an investment adviser of more than 5 of its Pennsylvania clients. Further, investment advisers often attempt to rely on the exclusion of exemption involving the provision of investment advice to institutional investors specifically with respect to clients that are small pension or profit sharing plans or trusts. “ Institutional investor” , as defined in Section 102(k), includes pension or profit sharing plans or trusts; however, the Commission issued an interpretive opinion in July, 1985, which states, in pertinent part: “ . . . the term ‘ pension or profit sharing plan or trust’ as used in Section 102(k) . . . shall apply only in the context of a KEOGH, IRA or SEP which has: 1. Plan assets of $5,000,000; or 2. (a) retained, on an ongoing basis, the services of a person knowledgeable and experienced in financial and business matters to render professional investment management advice; and (b) investment of $500,000 or more in securities.” American LegalNet, Inc. www.FormsWorkflow.com The Pennsylvania Securities Commission (“ Commission” ) at its meeting of A 23, 1991, permitted staff pril to publish the following staff position and staff no-action position: STAFF POSITION AND STAFF NO-ACTION POSITION On April 23, 1991, the staff adopted the position that broker-dealers who refer clients to investment advisers as part of a wrap fee or other formalized program or arrangement between the broker-dealer and the investment adviser are responsible for determining whether the investment adviser is registered with the Commission under Section 301, or whether the investment adviser is relying on an exclusion from the definition of investment adviser under Section 102(j) or exempted from registration under Section 302(d). Failure to ascertain the status of an investment adviser2 that is found to be in violation of Section 301 may result in imposition by the Commission of sanctions against the broker-dealer for aiding and abetting violations of Section 301 and/or failure to reasonably supervise its agents.3 The staff, however, will not recommend enforcement action to the Commission against a broker-dealer where the broker-dealer as part of a wrap fee or other formalized program or arrangement between the broker-dealer and the investment adviser refers or recommends to a Pennsylvania resident an investment adviser that is in violation of Section 301 if: The broker-dealer has established procedures, and a system for applying such procedures, which require verification of the registration or exclusion/exemption status of the investment advisers referred to Pennsylvania clients4. At a minimum, if the investment adviser claims registration in Pennsylvania, the broker-dealer should request a copy of the certificate of registration or obtain written confirmation from the Commission. If the investment adviser is claiming an exclusion from the definition of investment adviser or exempt status under the 1972 Act, such as the “ de minimus” client exemption unde r Section 302(d), the broker-dealer may rely on the adviser’ s claim unless it has any reason to believe otherwise. For example, if that broker-dealer’ s own client refe rrals to the adviser total more than five (other than broker-dealers, institutional investors, governmental agencies or other investment advisers) then the broker-dealer may not rely on the investment adviser’ s claim of exemption from registration. For further information contact: Zachary G. Ortenzio at telephone number (717) 787-5675 or VIA AT&T Relay Center 1-800-654-5984. Alternative formats of this document may be available on request; call (717) 787-1165 or VIA AT&T Relay Center 1-800-654-5984. 2 This determination should include an inquiry as to the specific exclusion or exemption being relied upon by the investment adviser. 3 Where an agent of a broker-dealer makes a casual referral of an investment adviser to a customer, without the knowledge of the broker-dealer, not as part of a formalized program or arrangement between the broker-dealer and the investment adviser, and without compensation to the broker-dealer and/or the agent, the staff of the Commission would not view the referral as a breach if supervisory responsibility by the broker-dealer. However, a broker-dealer, as part if its supervisory practices, should alert agents to the registration requirements for investment advisers. 4 An investment adviser’ s claim of registration or exclusion/exemption status need be verified by the broker-dealer only once. It is not necessary for a broker-dealer to perform periodic inquiries into an adviser’ s current status unless th e broker-dealer has reason to believe that the adviser no longer is registered or the exclusion or exemption has become unavailable. American LegalNet, Inc. www.FormsWorkflow.com REGISTRATION OF FINANCIAL PLANNERS The Pennsylvania Securities Commission is aware that much confusion exists with respect to whether a person or entity that holds itself out as a "financial planner" or uses some similar term is required to be registered as an investment adviser under the Pennsylvania Securities Act of 1972 ("1972 Act"). In order to clarify its position, the Commission offers the following guidance: A person or entity must be registered with the Pennsylvania Securities Commission as an investment adviser when compensation is received as part of their business activity for rendering advice as to the value of securities1 or as to the advisability of investing in, purchasing, or selling securities (whether such advice relates to specific securities or categories of securities). The foregoing applies equally to persons holding themselves out as financial planners (or some similar term) to the degree they receive compensation2 for rendering advice concerning securities. A registered agent of a registered broker-dealer is not required to register as an investment adviser if both (1) the agent engages in all advisory activities exclusively on behalf of the registered broker-dealer and (2) the activities are effected exclusively through the books and records of the registered broker-dealer. An agent who holds himself out individually as a financial planner (or some similar term) and who receives compensation for rendering advice concerning securities must be registered as an investment adviser. There are certain exclusions and exemptions from registration as an investment adviser contained in Sections 102(j) and 302(d) of the 1972 Act. The Division of Enforcement and Litigation is contacting persons and entities who are registered as investment advisers with the U.S. Securities and Exchange Commission, located in Pennsylvania, and not registered with the Pennsylvania Securities Commission. Enforcement proceedings will be instituted against persons violating the 1972 Act. Persons required to register as investment advisers may obtain a registration kit by contacting: Pennsylvania Securities Commission DIVISION OF LICENSING AND COMPLIANCE 1010 N. Seventh Street Eastgate Office Building, 2nd Fl. Harrisburg, PA 17102-1410 (717) 787-5675 TDD: AT&T RELAY CENTER 1-800-654-5984 1 "Securities" include, among other things, stocks, bonds, notes, limited partnership interests, mutual funds, and money market funds. [See Section 102(t) of the 1972 Act.] 2 This compensation element is satisfied by the receipt of any economic benefit, whether in the form of an advisory fee or some other fee relating to total services rendered, commissions on products sold as a result of the investment advice, or some combination of the foregoing. It is not necessary that a person who provides investment advisory and other services to a client charge a separate fee for the investment advisory portion of the total services. The compensation element is satisfied if a single fee is charged for a number of different services, including investment advice. [See U.S. Securities and Exchange Commission Release No. IA-1092.] American LegalNet, Inc. www.FormsWorkflow.com