BEFORE THE STATE AUDITOR AND COMMISSIONER OF SECURITIES

OF THE STATE OF MONTANA

 

In the matter of the proposed amendment of ARM 6.2.124 regarding Judicial Review, ARM 6.10.101 and 6.10.102 regarding Securities Regulation, the proposed transfer of ARM 6.10.104, 6.10.105, 6.10.108, 6.10.110, 6.10.125, 6.10.132, 6.10.134, 6.10.147, and 6.10.148, the proposed amendment and transfer of ARM 6.10.103, 6.10.111, 6.10.120, 6.10.121, 6.10.126, 6.10.127, 6.10.130, 6.10.131, 6.10.135, 6.10.136, 6.10.138, 6.10.140, 6.10.141, 6.10.142, 6.10.143, 6.10.145, and 6.10.149 regarding Securities Regulation, and the proposed adoption of NEW RULES I through VI pertaining to Senior Specific Certifications and Designations, and Filing Requirements for Transactional Exemptions

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NOTICE OF PUBLIC HEARING ON PROPOSED AMENDMENT, TRANSFER, AMENDMENT AND TRANSFER, AND ADOPTION

 

            TO: All Concerned Persons

 

            1. On September 5, 2008, a public hearing will be held at 10:30 a.m. in the 2nd floor conference room of the State Auditor's Office, Helena, Montana, to consider the proposed amendment, transfer, amendment and transfer, and adoption of the above-stated rules.

 

            2.  The State Auditor and Commissioner of Securities will make reasonable accommodations for persons with disabilities who wish to participate in this public hearing or need an alternative accessible format of this notice. If you require an accommodation, contact the State Auditor's Office no later than 5:00 p.m. on August 29, 2008, to advise us of the nature of the accommodation that you need. Please contact Darla Sautter, State Auditor's Office, 840 Helena Ave., Helena, MT 59601; telephone  (406) 444-2726 ; fax (406) 444-3497; TDD  (406) 444-3246 ; or e-mail [email protected].

 

3. The rules proposed to be amended provide as follows, stricken matter interlined, new matter underlined:

 

6.2.124 JUDICIAL REVIEW (1) Any person aggrieved by a final order of the securities commissioner may obtain a review of the order in any court of competent jurisdiction by filing in court, within sixty (60) days after the entry of the order, a written petition praying that the order be modified or set aside, in whole or in part.

(2) Judicial review is made of the evidence which was before the securities commissioner and hearings examiner when the final order was entered.

(3) Judicial review shall not be accomplished by trial de novo, however, new evidence may be adduced in accordance with 30-10-308, MCA. pursuant to the Montana Administrative Procedure Act judicial review provisions for contested cases found at 2-4-702, 2-4-703, 2-4-704, and 2-4-711, MCA.

 

AUTH: 30-10-107, MCA

IMP: 30-10-308, MCA 

 

            6.10.101 APPLICABILITY OF SUB-CHAPTER SUBCHAPTER  (1) Except as provided in (2), Tthis sub-chapter chapter applies to the securities and transactions involving securities, subject to the Securities Act of Montana, Title 30, chapter 10, parts 1 through 3, MCA.

            (2) ARM 6.10.138 does not apply to securities exempt under 30-10-104(1), MCA.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-107, MCA

 

            6.10.102 DEFINITIONS As used in this sub-chapter subchapter, unless the context indicates otherwise:

            (1) and (2) remain the same.

(3) "American depository receipt" is a negotiable certificate issued by a U.S. depository pursuant to an effective registration statement filed on form F-6 with the sSecurities and eExchange cCommission, representing the securities of a non-U.S. company, which securities are held in a similar type of receipt or instrument issued with respect to a security, which receipt of instrument has been approved for sale by order of the commissioner.

            (4) and (5) remain the same.

            (6) "Promoter"

            (a)  means a person who, acting alone or in conjunction with one or more persons, directly or indirectly, takes the initiative in founding and organizing the business or enterprise of an issuer or an officer, directory or party owning, directly or indirectly, 5% or more of the outstanding shares of the corporation before or immediately following the public offering, or any affiliate of the aforesaid persons; and

            (b)(a) does not include an unaffiliated institutional purchaser who purchased its shares more than 1 one year prior to the public offering.

            (7) "Promotional or developmental stage" means a corporation which has no public market for its shares and has no significant earnings within the past 5 five years (or shorter period of its existence).

            (8) "Promotional security" means:

            (a) a security issued within 3 three years before the date of registration in return for:

            (i) (a)  a price less than 85% of the consideration for which such securities are proposed to be sold to the public; or

            (ii) (i)  services rendered, patents, copyrights, other intangibles, or real or personal property, the actual value of which has not been established to the satisfaction of the commissioner; or

            (b) and (9) remain the same.

            (10) "Significant earnings" exist if the corporation's earnings record over the last 5 five years (or shorter period of its existence) demonstrates that for such period the corporation's net earnings per share is 30% of the public offering price per share (as adjusted for stock splits and stock dividends) or the corporation has earnings per share of 5% or more of the public offering price per share for each of any 2 two consecutive years.

(11) remains the same.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-104, 30-10-107, MCA

 

4. The rules proposed to be transferred are as follows:

 

OLD                 NEW               

6.10.104          6.10.202          Promotional Securities--Escrow

6.10.105          6.10.203          Promotional Securities--Required Waivers

6.10.108          6.10.205          Notice of Termination of Offering--Change of Officers

6.10.110          6.10.206          Stock Subscription Agreement--No Default or Penalty Provision

6.10.125          6.10.302          Foreign Savings and Loan Association Exemption

6.10.132          6.10.403          Sanctions Against Fraudulent Foreign Securities and Their Dealers

6.10.134          6.10.306          Transactional Exemptions for Cooperative Associations

6.10.147          6.10.208          Notice Filings for Offerings of Investment Company Securities

6.10.148          6.10.209          Notice Filings for Offerings of Federal Covered Securities Under 18(B)(3) or (4) of the Securities Act of 1933

 

5. The rules proposed to be amended and transferred provide as follows, stricken matter interlined, new matter underlined:

 

            6.10.103 (6.10.201) SALES MATERIALS (1) through (3) remain the same.

            (4) This rule does not apply to sales material that is used exclusively by a broker-dealer registered pursuant to 30-10-201, MCA, if the sales material conforms to the provisions of section 2210 of the conduct rules of the national association of securities dealers, inc Financial Industry Regulatory Authority, Inc. (FINRA).

            (5) through (7) remain the same.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-107, MCA

 

            6.10.111 (6.10.207) WARRANTS AND OPTIONS (1) through (1)(c)(ii) remain the same.

            (iii) the options or warrants may not be exercised for a period of 1 one year from the completion of the public offering;

            (iv) through (v) remain the same.

            (A) 7% each year they are outstanding, commencing 1 one year after issuance, so that the exercise price throughout the second year is 107%, throughout the third year is 114%, throughout the fourth year is 121%, and throughout the fifth year is 128%; or

            (B) 20% at any time after 1 one year from the date of issuance;

            (vi) the term of an option or warrant is not longer than 5 five years; and

            (vii) units of securities underlying the options or warrants acquired by an underwriter and related persons, whether acquired prior to, at the time of, or after the offering (but which is determined to be in connection with, or related to, the offering) are not, in the aggregate, more than 10% of the total number of shares that are outstanding at the conclusion of the offering. For purposes of this limitation, over-allotment units and units underlying options, warrants, or convertible securities that are a part of the proposed public offering are not to be counted as part of the aggregate number of shares being offered against which the 10% limitation is to be applied.

            (2) The commissioner may, upon a showing of good cause, approve an application even though warrants or options have been granted that do not meet the conditions specified in (1) of this rule. However, the burden of justifying issuance rests upon the applicant.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-107, 30-10-207, MCA

 

            6.10.120 (6.10.301) MONTANA LIMITED OFFERING EXEMPTION 

            (1) through (3) remain the same.

            (a) has filed a registration statement that is the subject of a currently effective registration stop order entered pursuant to a state's securities law within 5 five years prior to the filing of the notice required under this exemption;

            (b) has been convicted within 5 five years prior to the filing if the notice required under this exemption of a felony or misdemeanor in connection with the offer, purchase, or sale of a security or a felony involving fraud or deceit, including but not limited to forgery, embezzlement, obtaining money under false pretenses, larceny, or conspiracy to defraud;

            (c) is currently subject to a state administrative enforcement order or judgment entered by that state's securities administrator within 5 five years prior to the filing of the notice required under this exemption or is subject to a state's administrative enforcement order or judgment in which fraud or deceit, including but not limited to making untrue statements of material facts and omitting to state material facts, was found and the order or judgment was entered within 5 five years prior to the filing of the notice required under this exemption;

            (d) remains the same.

            (e) is currently subject to an order, judgment, or decree of a court of competent jurisdiction temporarily or preliminarily restraining or enjoining, or is subject to an order, judgment, or decree of a court of competent jurisdiction, permanently restraining or enjoining, the party from engaging in or continuing any conduct or practice in connection with the purchase or sale of a security or involving the making of a false filing with the state entered within 5 five years prior to the filing of the notice required under this exemption.

            (4) The prohibitions of (3)(a) through (3)(c) and (3)(e) do not apply if the person subject to the disqualification is licensed or registered to conduct securities-related business in the state in which the administrative order or judgment was entered against the person, or if the person subject to the disqualification is registered to conduct securities-related business by the Securities and Exchange Commission and the order or judgment was entered against the person by the Securities and Exchange Commission, or if the broker-dealer employing the person is registered in this state and the form BD as adopted by the North American sSecurities aAdministrators aAssociation, iInc., and filed with this state discloses the order, conviction, judgment, or decree relating to the person. A person disqualified under this rule may not act in a capacity other than that for which the person is registered.

            (5) and (6) remain the same.

            (a) a notice on an original, manually signed form D (17 CFR 239.500) at least ten days prior to an offer or sale being made to a person in this state, annually until completion and upon completion of the offer or sale, and at all such other times and in the form required under Securities Act of 1933, Regulation D, Rule 230.503, to be filed with the Ssecurities and Eexchange Ccommission. The notice must contain an undertaking by the issuer to furnish to the commissioner, upon written request, the information furnished by the issuer to offerees, unless the commissioner, by order, requires that the information be filed at the time with the filing of the notice.

            (b) through (9) remain the same.

            (10) In the case of offerings of direct participation programs as defined in section 2810 of the national association of securities dealers, inc.'s Financial Industry Regulatory Authority, Inc. (FINRA) conduct rules, each person who offers or sells securities in this state under this rule shall deliver a disclosure document containing the information required by Securities Act of 1933, Regulation D, Rule 230.502(b), to individuals covered by Securities Act of 1933, Regulation D, Rules 230.502(a)(5), 230.502(a)(6), and 230.502(a)(7).

            (11) and (12) remain the same.

 

            AUTH: 30-10-105, 30-10-107, MCA

            IMP:  30-10-104, 30-10-202, 30-10-211, MCA

 

            6.10.121 (6.10.501) REGISTRATION AND EXAMINATION - SECURITIES SALESPERSON, INVESTMENT ADVISER REPRESENTATIVES, BROKER-DEALERS, AND INVESTMENT ADVISERS (1) To become registered in this state as a securities salesperson or an investment adviser representative, the individual applicant shall pass the national association of securities dealers, inc., (NASD) Financial Industry Regulatory Authority, Inc. (FINRA) uniform securities agent state law exam or the uniform combined state law examination, or an examination designated by the commissioner. The applicant must also complete an application form described in (2). A salesperson applying to register with an issuer does not have to take an examination.

            (2) Each application for registration in this state must be made on the most current revised uniform application form as adopted by the North American sSecurities aAdministrators aAssociation (NASAA), unless the commissioner, by order, designates another form. Broker-dealers shall use NASD FINRA form BD, investment adviser representatives shall use NASD FINRA form ADV, and securities salespersons and investment adviser representatives shall use NASD FINRA form U-4.

            (3) Except as provided in (3)(a) and (b) of this rule, all applications, amendments, reports, notices, related filings, and fees required to be filed with the commissioner shall be filed electronically with and transmitted to the NASD's FINRA's investment adviser registration depositor (IARD) for investment advisers and investment adviser representatives or to the NASD's FINRA's central registration depository (CRD) for broker-dealers and salespersons:

            (a) except as provided in (3)(b) of this rule, salespersons representing issuers, salespersons of non-NASD FINRA firms and broker-dealers that are not members of the NASD FINRA shall file all applications, amendments, reports, notices, related filings, and fees directly with the commissioner;

            (b) through (6) remain the same.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-201, MCA

 

            6.10.126 (6.10.401) FRAUDULENT AND "UNETHICAL PRACTICES" PROHIBITED BY BROKER-DEALERS AND SALESMEN DEFINED (1)  For purposes of 30-10-201, and 30-10-301, MCA, fraudulent and unethical practices means, but is not limited to:

            (a) through (g) remain the same.

            (h) 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 Ssecurities and Eexchange Ccommission.;

            (i) through (n)(iii) remain the same.

            (o) 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;

            (p) through (p)(ii) remain the same.

            (q) using sales material or sales presentations in a deceptive or misleading fashion.;

            (r) 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. If the disclosure is not made in writing, it must be supplemented by giving, or sending a written disclosure at, or before, the completion or of the transaction.;

            (s) remains the same.

            (t) failing or refusing to furnish a customer, upon reasonable request, information to which he is entitled, or to respond to a formal written request or complaint; or

            (u) through (2)(g) remain the same.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-201, 30-10-301, MCA

 

            6.10.127 (6.10.402) FRAUDULENT, AND UNETHICAL AND DECEPTIVE PRACTICES PROHIBITED BY INVESTMENT ADVISORS AND INVESTMENT ADVISOR REPRESENTATIVES (1) A person who is a federal covered adviser, or an investment adviser, or an investment advisor representative is a fiduciary and has a duty to act for the benefit of its clients. The provisions of this rule apply to federal covered advisers to the extent that the conduct alleged is fraudulent, deceptive, or as otherwise permitted by the National Securities Markets Improvement Act of 1996 (PL 104-290). While the extent and nature of this duty varies according to the nature of the relationship between an investment adviser or a federal covered adviser and its clients and the circumstances of each case, an investment adviser or a federal covered adviser shall not engage in unethical business practices, including the following:

            (a) through (f) remain the same.

            (g) 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;

            (h) through (n)(ii) remain the same.

            (o) taking action, directly or indirectly, with respect to those securities or funds in which a client has a beneficial interest, if the investment adviser has custody or possession of the securities or funds when the investment 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, or the investment adviser is exempt from these requirements by virtue of Rule 206(4)-2(b);

            (p) entering into, extending, or renewing an investment advisory contract, other than a contract for impersonal services, 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 or the manner of calculation of the prepaid fee to be returned in the event of contract termination or nonperformance, and whether the contract grants discretionary power to the investment advisor or its representative, and that no assignment of such contract shall be made by the adviser without the consent of the other party;

            (q) remains the same.

            (i) the financial condition of the investment adviser that is reasonably likely to impair the ability of the investment adviser to meet contractual commitments to a client, if the investment adviser has express or implied discretionary authority or custody over the client's funds or securities or requires prepayment of advisory fees of more than $500 from the client, 6 six months or more in advance; or

            (ii) and (r) remain the same.

           (s) entering into, extending, or renewing any advisory contract contrary to the provisions of section 205 of the Investment Advisers Act of 1940. This provision is hereby adopted and incorporated herein, and applies to all advisers registered or required to be registered under the Securities Act of Montana, notwithstanding the fact that such investment adviser is not registered or required to be registered under section 203 of the Investment Advisers Act of 1940. Section 205 establishes standards for investment advisory contracts entered into by the adviser and may be obtained from the Commissioner of Securities, P.O. Box 4009 840 Helena Avenue, Helena, MT 59604 59601;

           (t) to indicate, in an advisory contract, any condition, stipulation, or provisions binding any person to waive compliance with any provision of this act or of the Investment Advisers Act of 1940, or any other practice contrary to the provisions of section 215 of the Investment Advisers Act of 1940, which is hereby adopted and incorporated herein notwithstanding the fact that such investment adviser is not registered or required to be registered under section 203 of the Investment Advisers Act of 1940. Section 215 of the Investment Advisers Act of 1940 establishes standards for the validity of advisory contracts, and may be obtained from the Commissioner of Securities, P.O. Box 4009 840 Helena Avenue, Helena, MT 59604 59601;

            (u) engaging in any act, practice, or course of business which is fraudulent, deceptive, or manipulative, or contrary to the provisions of section 206(4) of the Investment Advisers Act of 1940, which is hereby adopted and incorporated herein, notwithstanding the fact that such investment adviser is not registered or required to be registered under section 203 of the Investment Advisers Act of 1940. Section 206(4) of the Investment Advisors Act of 1940 establishes prohibited practices in the investment advisory business, and may be obtained from the Commissioner of Securities, P.O. Box 4009, 840 Helena Avenue, Helena, MT 59604 59601;

            (v) through (w) remain the same.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-201, 30-10-301, MCA

 

            6.10.130 (6.10.303) SECOND TIER LIMITED OFFERING EXEMPTION

            (1) remains the same.

            (2) An issuer using the second tier limited offering exemption shall file with the Ccommissioner of Ssecurities:

            (a) and (b) remain the same.

            (c) a consent to service of process which is attached to and made part of the second tier limited offering exemption form; and

            (d) such other information as the Ccommissioner of Ssecurities may require.

            (3) Upon the entry to of an order denying or revoking the approval of this exemption, the Ccommissioner of Ssecurities shall promptly notify the issuer of the securities that an order has been entered and of the reasons therefor and that, if requested by the issuer within 15 days after the receipt of the Ccommissioner of Ssecurities' order, the matter will be promptly set down for hearing. If no hearing is requested within 15 days, and none is ordered by the Ccommissioner of Ssecurities, the order will remain in effect until it is modified or vacated by the Ccommissioner of Ssecurities. If a hearing is requested or ordered, the Ccommissioner of Ssecurities, after notice of and opportunity for hearing, may affirm, modify, or vacate the order.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-105, MCA

 

            6.10.131 (6.10.305) FOREIGN SECURITY EXEMPTION (1) and (1)(a) remain the same.

            (i) This exemption is not available for sales of securities constituting an unsold allotment to, or subscription by, the broker-dealer as a participant in the distribution of the securities by the issuer or by or through an underwriter.

            (ii) through (iii) remain the same.

            (A) the issuer, including any predecessors, has been in continuous operation for at least the preceding 2 two years, is a going concern actually engaged in business and is not in an organizational or developmental stage, and is not in bankruptcy or receivership; and

            (B) the issuer has net tangible assets of at least U.S. $25,000,000 as of the date of its most recent externally audited financial statement prepared in accordance with U.S. or foreign GAAP. Such statement shall be dated as of a date within 18 months of the date of the transaction; and

            (C) the issuer had an average gross income of at least U.S. $5,000,000 over its most recent 2 two consecutive years of operation according to audited profit and loss statements of the issuer prepared in accordance with U.S. or foreign GAAP for the issuer's two fiscal years immediately preceding the date of the financial statement referred to in (1)(a)(iii)(B); and

            (D) through (1)(b) remain the same.

 

            AUTH: 30-10- 107, MCA

            IMP: 30-10-104, 30-10-107, MCA

 

            6.10.135 (6.10.502) CANADIAN BROKER-DEALERS AND SALESPERSONS (1) A Canadian broker-dealer that is resident in Canada, and has no office or other physical presence in the United States, and is not an office of, branch of, or a natural person associated with a broker-dealer otherwise registered in the United States may transact business in this state without registering as a broker-dealer pursuant to 30-20-201, MCA, under the following conditions:

            (a) through (d) remain the same.

            (2) A Canadian securities salesperson representing a Canadian broker-dealer transacting business in this state pursuant to (1) of this rule need not register pursuant to 30-10-201, MCA, provided that he or she is registered in good standing in the appropriate Canadian jurisdiction.

            (3) Transactions by Canadian broker-dealers and their salespersons pursuant to (1) and (2) of this rule will be deemed not to involve the "offer" or "sale" of a security, as those terms are defined in 30-10-103, MCA, for purpose of compliance with 30-10-202, MCA, and the rules promulgated thereunder. Nothing in this rule shall affect the duty of the Canadian broker-dealer and its agents to comply with 30-10-301, MCA, and the rules promulgated thereunder.

 

            AUTH: 30-10-105, 30-10-107, MCA

            IMP: 30-10-201, MCA

 

            6.10.136 (6.10.503) MINIMUM FINANCIAL REQUIREMENTS AND FINANCIAL REPORTING OF BROKER-DEALERS (1) and (2) remain the same.

            (3) The commissioner hereby adopts and incorporates by reference the rules cited in (1) and (2), which establish net capitalization requirements, customer free credit balance requirements, customer protection reserves, net capital decline reporting requirements, and capitalization reporting requirements. A copy of these rules may be obtained from the Securities Department, P.O. Box 4009 840 Helena Avenue, Helena, MT 59604 59601.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-107, 30-10-201, MCA

 

            6.10.138 (6.10.504) BROKER-DEALER BOOKS AND RECORDS  

            (1)  Unless otherwise provided by order of the commissioner, each registered broker-dealer shall make, maintain, and preserve books and records in compliance with the United States sSecurities and eExchange cCommission rules 17a-3 (17 CFR 240.17a-3 (1998)), 17a-4 (17 CFR 240.17a-4 (1998)), and 15c2-11 (17 CFR 240.15c2-11 (1998)) which are adopted and incorporated herein by this reference, and establish recordkeeping requirements related to the conduct of the business as a securities broker-dealer. Copies of these rules may be obtained from the Commissioner of Securities, P.O. Box 4009 840 Helena Avenue, Helena, MT 59604 59601.

            (2)  To the extent that the Ssecurities and Eexchange Ccommission promulgates changes to the above-referenced rules, dealers in compliance with such rules as amended shall not be subject to enforcement action by the commissioner for violation of this rule to the extent that the violation results solely from the dealer's compliance with the amended rule.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-201, MCA

 

            6.10.140 (6.10.506) MINIMUM FINANCIAL REQUIREMENTS FOR INVESTMENT ADVISERS (1) Except as provided in (5), unless an investment adviser posts a bond pursuant to ARM 6.6.141, an investment adviser registered, or required to be registered, under the Securities Act of Montana who has custody of client funds or securities shall maintain at all times a minimum net worth of $35,000. An investment adviser registered, or required to be registered, under the Securities Act of Montana who has discretionary authority over client funds or securities but does not have custody of client funds or securities, shall maintain at all times a minimum net worth of $10,000.

            (2) Unless otherwise exempted, as a condition of the right to continue to transact business in this state, every investment adviser registered, or required to be registered, under the Securities Act of Montana shall by the close of business on the next business day notify the commissioner if such investment adviser's total worth is less than the minimum required. After transmitting such notice, each investment adviser shall file by the close of business on the next business day a report with the commissioner of its financial condition, including the following:

            (a) through (4) remain the same.

            (5) An investment adviser that has its principal place of business in a state other than this state is not required to comply with the requirements of this rule, provided that the investment adviser is licensed in the state, and is in compliance with the state's minimum capital requirements, if any.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-107, 30-10-201, MCA

 

            6.10.141 (6.10.507) BONDING REQUIREMENTS FOR CERTAIN INVESTMENT ADVISERS (1) Every investment adviser having custody of, or discretionary authority over, client funds or securities shall be bonded in the amount of $35,000.

            (2) An investment adviser that has its principal place of business in a state other than this state shall be exempt from the requirements of (1), provided that the investment adviser is registered as an investment adviser in the state where it has its principal place of business, and is in compliance with such state's requirements relating to bonding, if any.

 

            AUTH: 30-10-107, MCA

            IMP:  30-10-107, 30-10-201, MCA

 

            6.10.142 (6.10.508) CUSTODY OF CLIENT FUNDS OR SECURITIES BY INVESTMENT ADVISERS (1)  It shall be unlawful for any investment adviser to take, or have custody of, any securities or funds of any client unless:

            (a) the investment adviser notifies the commissioner in writing that the investment adviser has, or may have, custody. Such notification may be given on Form ADV;

            (b) the securities of each client are segregated, marked to identify the particular client having the beneficial interest therein, and held in safekeeping in some place reasonably free from risk of destruction or other loss:

            (i) through (iii) remain the same.

            (c) immediately after accepting custody or possession of funds or securities from any client, the investment adviser notifies the client in writing of the place where, and the manner in which, the funds and securities will be maintained and subsequently, if and when there is a change in the place where, or the manner in which, the funds or securities are maintained, the investment adviser gives written notice thereof to the client;

            (d) at least once every three months, the investment adviser sends each client an itemized statement showing the funds and securities in the investment adviser's custody at the end of such period, and all debits, credits, and transactions in the client's account during such period; and

            (e) remains the same.

            (f) for purposes of this rule, a person will be deemed to have custody if said person directly, or indirectly, holds client funds or securities, has any authority to obtain possession of them, or has the ability to appropriate them.

(2) through (2)(b) remain the same.

 

AUTH: 30-10-107, MCA

IMP: 30-10-107, 30-10-201, MCA

 

            6.10.143 (6.10.510) INVESTMENT ADVISER BOOKS AND RECORDS  

            (1) Except as otherwise provided in (5) of this rule, an investment adviser registered or required to be registered under the Securities Act of Montana must make and keep true, accurate, and current the following books, ledgers, and records:

            (a) those books and records required to be maintained and preserved in compliance with Rule 204-2(a)(1)-(5), (7), (9), (10), (12), (13), (15), and (16) of the Investment Advisers Act of 1940 (17 CFR 275.204-2 (1998)), hereby adopted and incorporated by reference, notwithstanding the fact that the investment adviser is not registered or required to be registered under the Investment Advisers Act of 1940. Rule 204-2 establishes books and records maintenance requirements pertaining to the conduct of business as an investment adviser. Copies of these rules may be obtained from the Commissioner of Securities, P.O. Box 4009 840 Helena Avenue, Helena, MT 59604 59601;

            (b) through (d) remain the same.

            (e) a copy of each written statement and each amendment or revision given or sent to any client or prospective client of the investment adviser in accordance with the provisions of 30-10-201(12)(b), MCA, and a record of the dates that each written statement, and each amendment or revision was given or offered to be given to any client or prospective client who subsequently becomes a client;

            (f)  for each client that was obtained by the adviser by means of a solicitor to whom a cash fee was paid by the adviser, records required by Rule 206(4)-3 of the Investment Advisers Act of 1940 (17 CFR 275.206(4)-3 (1998)), which is hereby adopted and incorporated by this reference, notwithstanding the fact that the investment adviser is not registered, or required to be registered, under the Investment Advisers Act of 1940;

            (g) through (j) remain the same.

            (k) a file containing a copy of each document (other than any notices of general dissemination) that was filed with, or received from, any state or federal agency or self regulatory organization, and that pertains to the registrant or its investment adviser representatives which file should contain, but is not limited to, all applications amendments, renewal filings, and correspondence.

            (2) Every investment adviser subject to (1) of this rule shall preserve the following records in the manner prescribed:

            (a) books and records required to be made under the provisions of (1)(a) shall be maintained and preserved in an easily accessible place for a period of not less than 5 five years from the end of the fiscal year during which the last entry was made on such record, the first 2 two years in the principal office of the investment adviser; and

            (b) books and records required to be made under (1)(b) through (1)(k) must be maintained and preserved in an easily accessible place for a period of not less than 5 five years from the end of the fiscal year during which the last entry was made on such record, the first 2 two years in the principal office of the investment adviser or for the time period during which the investment adviser was registered, or required to be registered, in the state, if less.

            (3) through (3)(a)(i) remain the same.

            (ii) subsections (1)(c), (1)(e), (1)(i), and (1)(k) of this rule.

            (4) and (5) remain the same.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-201, MCA

 

            6.10.145 (6.10.511) NOTICE FILING REQUIREMENTS FOR FEDERAL COVERED ADVISERS (1) The notice filing for a federal covered adviser pursuant to 30-10-201, MCA, shall be filed with the commissioner, or with a central registration depository designated by the commissioner on an executed Form ADV (uniform application for investment adviser registration (17 CFR 279.1 (1998)) and shall include:

            (a) and (b) remain the same.

            (2) A federal covered adviser shall file with the commissioner a copy of each amendment to its Form ADV when such amendment is filed with the Ssecurities and Eexchange Ccommission.

            (3) The renewal of the notice filing for a federal covered adviser pursuant to 30-10-209(2)(c), MCA, shall be filed upon the first page of an executed Form ADV (uniform application for investment adviser registration (17 CFR 279.1 (1998)), and shall contain the fee required under 30-10-209, MCA. Such filing shall be accompanied by any amendments or documents filed with the Ssecurities and Eexchange Ccommission that have not previously been provided to the commissioner.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-201, MCA

 

            6.10.149 (6.10.210) NOTICE FILING PROCEDURES FOR RULE 506 OFFERINGS (1) An issuer offering a security that is a covered security under section 18(b)(4)(D) of the Securities Act of 1933 shall file a notice on Form D (17 CFR 239.500), a consent to service of process on a form prescribed by the commissioner, and pay the fee required by 30-10-209(1)(a) and (1)(c), MCA, no later than 15 days after the first sale of the security in this state.

            (2) For purposes of this rule, the SEC "Form D" is defined as the document, as adopted by the Ssecurities and Eexchange Ccommission and in effect on September 1, 1996, as may be amended by the SEC from time to time, entitled "Form D; notice of sale of securities pursuant to regulation D, section 4(6), and/or uniform limited offering exemption," including Part E and the Appendix.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-202, 30-10-211, MCA

 

            6. The new rules proposed to be adopted provide as follows:

 

            NEW RULE I SENIOR SPECIFIC CERTIFICATIONS AND DESIGNATIONS GENERALLY UNLAWFUL (1) The use of a senior specific certification or designation by any person in connectionwith the offer, sale, or purchase of securities, or the provision of advice as to the value of or the advisability of investing in, purchasing, or selling securities, either directly or indirectly or through publications or writings, or by issuing or promulgating analyses or reports relating to securities, that indicates or implies that the user has special certification or training in advising or servicing senior citizens or retirees, in such a way as to mislead any person shall be a dishonest, fraudulent, and unethical practice in the securities business within the meaning of 30-10-201(13)(g) and 30-10-301, MCA. The prohibited use of such certifications or professional designation includes, but is not limited to, the following:

            (a) use of a certification or professional designation by a person who has not actually earned or is otherwise ineligible to use such certification or designation;

            (b) use of a nonexistent or self-conferred certification or professional designation;

            (c) use of a certification or professional designation that indicates or implies a level of occupational qualifications obtained through education, training, or experience that the person using the certification or professional designation does not have; and

            (d) use of a certification or professional designation that was obtained from a designating or certifying organization that:

            (i) is primarily engaged in the business of instruction in sales and/or marketing;

            (ii) does not have reasonable standards or procedures for assuring the competency of its designees or certificants;

            (iii) does not have reasonable standards or procedures for monitoring and disciplining its designees or certificants for improper or unethical conduct; or

            (iv) does not have reasonable continuing education requirements for its designees or certificants in order to maintain the designation or certificate.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-201, 30-10-301, MCA

 

            NEW RULE II REBUTTABLE PRESUMPTION REGARDING CERTAIN DISQUALIFICATIONS (1) There is a rebuttable presumption that a designating or certifying organization is not disqualified solely for purposes of [NEW RULE I(1)(d)], when the organization has been accredited by:

            (a) The American National Standards Institute;

            (b) The National Commission for Certifying Agencies; or

            (c) an organization that is on the United States Department of Education's list entitled "Accrediting Agencies Recognized for Title IV Purposes" and the designation or credential issued therefrom does not primarily apply to sales and/or marketing.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-201, 30-10-301, MCA

 

            NEW RULE III FACTORS CONSIDERED TO DETERMINE UNLAWFUL CERTIFICATIONS OR DESIGNATIONS (1) In determining whether a combination of words (or an acronym standing for a combination of words) constitutes a certification or professional designation indicating or implying that a person has special certification or training in advising or servicing senior citizens or retirees, factors to be considered shall include:

            (a) use of one or more words such as "senior," "retirement," "elder," or like words, combined with one or more words such as "certified," "registered," "chartered," "adviser," "specialist," "consultant," "planner," or like words, in the name of the certification or professional designation; and

            (b) the manner in which those words are combined.

 

AUTH: 30-10-107, MCA

IMP: 30-10-201, 30-10-301, MCA

 

            NEW RULE IV CERTIFICATIONS OR DESIGNATIONS NOT CONSIDERED UNLAWFUL (1) For purposes of this rule, a senior certification or professional designation does not include a job title within an organization that is licensed or registered by a state or federal financial services regulatory agency, when that job title:

            (a) indicates seniority or standing within the organization; or

            (b) specifies an individual's area of specialization within the organization.

            (2) For purposes of this rule, financial services regulatory agency includes, but is not limited to, an agency that regulates broker-dealers, investment advisers, or investment companies as defined under the Investment Company Act of 1940.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-201, 30-10-301, MCA

 

NEW RULE V RULES NOT LIMITING AUTHORITY (1) Nothing in these rules shall limit the commissioner's authority to enforce existing provisions of law.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-201, 30-10-301, MCA

 

            NEW RULE VI FILINGS REQUIREMENT FOR TRANSACTIONAL EXEMPTION PURSUANT TO 30-10-105(15), MCA (1) A request for a transactional exemption pursuant to 30-10-105(15), MCA, shall include:

            (a) a letter of request explaining why an exemption would serve the purposes of 30-10-102, MCA;

            (b) a U-2 consent to service of process form; and

            (c) a fee of $50.

            (2) A transactional exemption granted pursuant to a request under (1) is effective for one year following the date of the commissioner's granting of the exemption request. Prior to the expiration date of the exemption, an exemption may be renewed by filing a $50 fee with the commissioner. A renewed exemption shall be effective for one year commencing upon the expiration of the exemption filing being renewed.

 

            AUTH: 30-10-107, MCA

            IMP: 30-10-105, 30-10-301, MCA

 

STATEMENT OF REASONABLE NECESSITY: The Securities Division is proposing to organize its current administrative rules into subchapters for the purpose of logically grouping related topics in order to facilitate use and readability.

 

NEW RULE I is necessary to define specific types of activity that are prohibited by 30-10-201(13)(g), MCA. Recently, NASAA member states that the SEC (federal regulator) and FINRA (self-regulating organization) have seen an increase in the use of unsupported and unaccredited senior designations as a means to commit fraudulent acts against senior investors. The agency finds this rule a necessary tool in its efforts to curb the fraudulent use of such designations.

 

NEW RULE II is necessary to define rebuttable presumptions against the prohibited activity described in NEW RULE I, placing a limitation on the agency to avoid oppressive use of the agency's regulatory powers while allowing appropriate regulation of persons using senior designations unlawfully.

 

NEW RULE III is necessary to define criteria specific to the unlawful designations in order to avoid any vagueness or ambiguity with regard to what terms and what actions constitute an unlawful senior designation.

 

NEW RULE IV is necessary to clarify that the definition of unlawful "senior designations" is limited to those that are used to mislead or misrepresent a person's ability to perform certain tasks associated with the securities industry.

 

NEW RULE V is necessary to clarify that the rule is not an unlawful limitation on the State Auditor in the capacity of ex-Officio Securities Commissioner.

 

NEW RULE VI is necessary to promote the public interest and for the protection of investors. It is consistent with the purposes of the policies and provisions of Title 30, chapter 10, part 1 through 3, MCA. The addition of this rule to the Securities Division's rules is required by the Legislative Auditor to inform the public regarding the fees and other requirements to effect a transactional exemption pursuant to 30-10-105(15), MCA.

 

7. Concerned persons may present their data, views, or arguments concerning the proposed actions either orally or in writing at the hearing. Written data, views, or arguments may also be submitted to Roberta Cross Guns, State Auditor's Office, 840 Helena Ave., Helena, Montana 59601; telephone  (406) 444-5234 ; fax (406) 444-5558; or e-mail [email protected]; and must be received no later than 5:00 p.m., September 12, 2008.

 

8. Roberta Cross Guns, Staff Attorney, has been designated to preside over and conduct the hearing.

 

9. The State Auditor's Office maintains a list of concerned persons who wish to receive notices of rulemaking actions proposed by this agency. Persons who wish to have their name added to the list shall make a written request that includes the name and mailing address of the person to receive notices, and specifies for which program the person wishes to receive notices.  Such written request may be mailed or delivered to Darla Sautter, State Auditor's Office, 840 Helena Ave., Helena, MT 59601; e-mailed to [email protected]; faxed to the office at  (406) 444-5558 ; or may be made by completing a request form at any rules hearing held by the State Auditor's Office.

 

10. An electronic copy of this Proposal Notice is available through the Secretary of State's web site at http://sos.mt.gov/ARM/Register. The Secretary of State strives to make the electronic copy of the Notice conform to the official version of the Notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the Notice and the electronic version of the Notice, only the official printed text will be considered. In addition, although the Secretary of State works to keep its web site accessible at all times, concerned persons should be aware that the web site may be unavailable during some periods, due to system maintenance or technical problems.

 

11. The bill sponsor notice requirements of 2-4-302, MCA, do not apply.

 

/s/ Janice S. VanRiper                                      /s/ Christina L. Goe            

JANICE S. VANRIPER                                     CHRISTINA L. GOE

Deputy State Auditor                                         Rule Reviewer

 

            Certified to the Secretary of State August 4, 2008.