Articles Tagged with Uniform Securities Act

Mark Twain is alleged to have said, “When the end of the world comes, I want to be in Kentucky because everything happens there twenty years later than it happens anywhere else.”

That bit of “wisdom” is more than a bit unfair to Kentucky, but it has proven true in connection with investment adviser law. In an interesting judicial opinion earlier this year, the Kentucky Court of Appeals reached the same conclusion that the federal courts reached over thirty years ago on essentially the same issue. The Kentucky Court held that an investment manager who was paid to manage the brokerage accounts of two clients was “an Investment Adviser” under the Kentucky Securities Act (“KSA”), even though he never discussed with or recommended securities transactions to the clients.The case demonstrates how concepts that are taken for granted and seem to be well-settled and beyond dispute by financial professionals, regulators and seasoned professionals in the investment adviser arena can sometimes lead to protracted and uncertain litigation.

The case is Lawrence Rosen v. Commonwealth of Kentucky, Department of Financial Institutions, et al.. At issue were enforcement charges by Kentucky’s Department of Financial Institutions (“DFI”) against one Lawrence Rosen (“Rosen”) who operated a sole proprietorship under the name Larry Rosen Company out of his home in Louisville, Kentucky. Rosen had entered into contracts with two clients under which Rosen would be compensated by payment of 10% of the gross proceeds of option sales, dividends, and interest received for all transactions that he made in the course of managing the accounts of the two clients. The contracts gave Rosen complete discretion over all securities traded in the accounts, meaning that he was not required to obtain any approval prior to implementing a transaction. Rosen performed both contracts by purchasing and selling securities in both clients’ accounts and by receiving the compensation as set forth in a contract. He conducted all these activities without registering under the KSA.
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The North American Securities Administrators Association (NASAA) today published for comment a proposed custody rule for investment advisers. The proposed rule modifies the account statement detail requirement in subsection (b)(4)(A) of a proposed rule previously issued by NASAA relating to the same subject.

Comments to the previous proposed rule focused on the requirement that an investment adviser to private funds provide detailed quarterly statements to all clients. In response to these overwhelming comments, NASAA modified subsection (b)(4)(A) to reduce the level of detail to be contained in the quarterly statements that are to be sent to investment fund participants. Under the new proposed rule, the quarterly statements need only contain the quarter-end holdings and transactions during the quarter.

The basic structure of the proposed custody rule is consistent with prior model custody rules proposed by NASAA pursuant to Uniform Securities Acts of 1956 and 2002 and adopted by many states. More specifically, it provides for a number of safekeeping requirements including, among other things, providing notice to the state’s securities administrator, employing a qualified custodian, and giving certain notices to clients. In particular, the NASAA proposed rule requires any investment adviser who sends a statement to a client to urge the client to compare the account statements received from a qualified custodian with those received from the investment adviser. Any adviser who has a reasonable basis for believing that the qualified custodian sent account statements to the investors directly need not provide a separate account statement.
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