DOB: Winter 2004 Securities Bulletin

Securities and Business Investments Division

Securities Bulletin

Vol. XVIII  No. 4 Winter 2004

Features

Enforcement and Other Highlights

Contributors

Ralph Lambiase, Division Director
Cynthia Antanaitis, Assistant Director and Bulletin Editor
Eric Wilder, Assistant Director
Helen Crane, Subscription Coordinator


{ } A WORD FROM THE BANKING COMMISSIONER

This issue of the Securities Bulletin focuses on three very timely matters of interest to investment advisers registered with the State of Connecticut. Recently, the Securities and Exchange Commission implemented new rules governing the custody of client funds and securities; the development of investment advisory codes of ethics; and the need for federally registered investment advisers to designate a compliance officer. Several state-registered firms have asked the department whether the state would take a regulatory approach similar to that espoused by the SEC.

In response, on February 4, 2005, the department issued an Order Updating Custody Requirements for State-Registered Investment Advisers. The Order modernizes Connecticut's regulatory scheme by recognizing that most advisers utilize the services of a designated custodian such as a bank or other financial institution. The Order draws heavily on its federal counterpart and on model provisions adopted by the North American Securities Administrators Association, Inc.

In a recent policy statement, the department also addressed the need for state-registered investment advisers to adopt a formal code of ethics. The department concluded that, although the Connecticut Uniform Securities Act and its Regulations do not require that state-registered investment advisers prepare a separate ethical code, ethical concerns should be integrated into the adviser's supervisory and compliance procedures as well as its business operations. In addition, the policy statement recommended several areas for investment advisory firms to address in avoiding improper conflicts of interest.

An additional policy statement focused on whether Connecticut would promulgate an analogue to Rule 206(4)-7 which mandates that SEC-registered investment advisers designate a compliance officer to oversee their compliance systems. Given the existing requirement under Connecticut law that state-registered investment advisers have an adequate supervisory system in place, the department is not promulgating an additional regulation to mirror new SEC Rule 206(4)-7 at this time. State-registered investment advisers are reminded, however, that the implementation of comprehensive supervisory procedures goes a long way toward minimizing business risks and preventing dishonest or unethical practices, including material conflicts of interest and the misappropriation of client assets.

As always, we welcome your comments.

John P. Burke
Banking Commissioner


{ } ORDER UPDATING CUSTODY REQUIREMENTS FOR
STATE-REGISTERED INVESTMENT ADVISERS

WHEREAS, the Banking Commissioner ("Commissioner") is charged with administering Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act ("Act"), and Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies ("Regulations") promulgated under the Act;

WHEREAS, Section 36b-31(a) of the Act provides, in pertinent part, that "[t]he commissioner may from time to time make . . . such . . . orders as are necessary to carry out the provisions of . . . [the Act] . . . . For the purpose of . . . orders, the commissioner may classify securities, persons and matters within his jurisdiction, and prescribe different requirements for different classes";

WHEREAS, Section 36b-31(b) of the Act provides, in pertinent part, that "[n]o . . . order may be made . . . unless the commissioner finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of . . . [the Act]";

WHEREAS, the Commissioner finds that the issuance of this Order is necessary and appropriate in the public interest and for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of the Act;

WHEREAS, Section 36b-31(c) of the Act adds that "[t]o encourage uniform interpretation and administration of . . . [the Act] and effective securities regulation and enforcement, the commissioner may cooperate with the securities agencies or administrators of other states . . . [and with] the Securities and Exchange Commission . . .";

WHEREAS, Section 36b-5(c) of the Act provides that "[i]t is unlawful for any investment adviser that is registered or required to be registered under . . . [the Act] to take or have custody of any securities or funds of any client if: (1) The commissioner by regulation prohibits custody; or (2) in the absence of a regulation, the investment adviser fails to notify the commissioner that he has or may have custody";

WHEREAS, the Commissioner, acting pursuant to the authority granted by Section 36b-5(c) of the Act, promulgated Section 36b-31-5b of the Regulations, which makes it a fraudulent, deceptive or misleading act, practice or course of business for any investment adviser having custody or possession of funds or securities in which any client has any beneficial interest to take any action, directly or indirectly, with respect to those funds or securities unless certain requirements are met;

WHEREAS, Section 36b-31-5b of the Regulations was patterned after Securities and Exchange Commission ("SEC") Rule 206(4)-2, 17 C.F.R. 275.206(4)-2, promulgated under the Investment Advisers Act of 1940;

WHEREAS, effective November 5, 2003, the SEC revised Rule 206(4)-2 to conform the rule to modern custodial practices. The revised rule required federally-regulated investment advisers to comply with its terms by April 1, 2004;

WHEREAS, on April 18, 2004, the North American Securities Administrators Association, Inc. ("NASAA") adopted amendments to the NASAA model rules governing investment adviser custody which amendments paralleled the SEC's revisions to
Rule 206(4)-2;

WHEREAS, Section 36b-31-31c of the Regulations provides that "[t]he commissioner may exempt a person, security or transaction from a specified provision of sections 36b-31-2 to 36b-31-33, inclusive, of the regulations upon a finding that such exemption is in the public interest";

AND WHEREAS, the Commissioner finds that the exemption provided by this Order is in the public interest.

NOW THEREFORE, THE COMMISSIONER ORDERS AS FOLLOWS:

1. Definitions. For purposes of this Order:
(a)  "Custody" means holding, directly or indirectly, client funds or securities, having any authority to obtain possession of them, or having the ability to appropriate them. "Custody" includes (i) possession of client funds or securities unless received inadvertently and returned to the sender promptly, but in any case within three business days of receiving them; (ii) any arrangement, including a general power of attorney, under which the investment adviser is authorized or permitted to withdraw client funds or securities maintained with a custodian upon the investment adviser's instruction to the custodian; and (iii) any capacity, such as general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust, that gives the investment adviser or its investment adviser agent legal ownership of or access to client funds or securities. "Custody" does not include the receipt of checks drawn by clients and made payable to unrelated third parties where the checks are forwarded to the third party within twenty-four hours of receipt;
(b) "Independent party", as used in paragraph 3(g) of this Order, means a person that: (i) is engaged by the investment adviser to act as a gatekeeper for the payment of fees, expenses and capital withdrawals from a pooled investment; (ii) does not control, is not controlled by and is not under common control with the investment adviser; and (iii) does not have, and has not had within the past two years, a material business relationship with the investment adviser;
(c) "Independent representative" means a person who (i) acts as agent for an advisory client, including, in the case of a pooled investment vehicle, for limited partners of a limited partnership, members of a limited liability company, or other beneficial owners of another type of pooled investment vehicle, and who by law or contract is obliged to act in the best interest of the advisory client or the limited partners, members or other beneficial owners; (ii) does not control, is not controlled by, and is not under common control with the investment adviser; and (iii) does not have, and has not had within the past two years, a material business relationship with the investment adviser;
(d) "Qualified custodian" means the following independent institutions or entities: (i) a bank or savings association that has deposits insured by the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act; (ii) a registered broker-dealer holding the client assets in customer accounts; (iii) a futures commission merchant registered under Section 4f(a) of the Commodity Exchange Act, 7 U.S.C. 6f(a), holding the client assets in customer accounts, but only with respect to clients' funds and security futures or other securities incidental to transactions in contracts for the purchase or sale of a commodity for future delivery and options thereon; and (iv) a foreign financial institution that customarily holds financial assets for its customers, provided that the foreign financial institution keeps the advisory clients' assets in customer accounts segregated from its proprietary assets;
2. Exemption for Compliance With Updated Custody Requirements. An investment adviser registered or required to be registered under the Act that fulfills the conditions for having custody set forth in this Order shall be exempt from the custody requirements in Section 36b-31-5b(a) of the Regulations;
3. Conditions to be Met.
(a) Notice to the Commissioner. The investment adviser shall notify the Commissioner promptly in writing on Form ADV that the investment adviser has or may have custody.
(b) Maintenance of Client Funds and Securities by Qualified Custodian.
(i) General Rule. A qualified custodian shall maintain client funds and securities (A) in a separate account for each client under that client's name, or (B) in accounts that contain only the investment adviser clients' funds and securities, under the name of the investment adviser as agent or trustee for the clients.
(ii) Exceptions.
(A) With respect to shares of an open-end company as defined in Section 5(a)(1) of the Investment Company Act of 1940, 15 U.S.C. 80a-5(a)(1) ("mutual fund"), an investment adviser registered or required to be registered under the Act may use the mutual fund's transfer agent in lieu of a qualified custodian.
(B) An investment adviser that intends to have custody of client funds or securities but is not able to utilize a qualified custodian shall first obtain approval from the Commissioner and shall comply with all of the applicable safekeeping requirements under paragraph 3 of this Order, including taking responsibility for those provisions that are designated to be performed by a qualified custodian.
(c) Notice to Clients. If the investment adviser opens an account with a qualified custodian on behalf of the advisory client, either under the client's name or under the investment adviser's name as agent, the investment adviser shall notify the client in writing of the qualified custodian's name, address and the manner in which the funds or securities are maintained, promptly when the account is opened and following any changes to this information;
(d)
(i) Sending of Account Statements to Clients. Account statements shall be sent to clients, either by a qualified custodian or by the investment adviser. If the investment adviser is a general partner of a limited partnership, a managing member of a limited liability company or holds a comparable position for another type of pooled investment vehicle, the account statements shall be sent to each limited partner, member or other beneficial owner or the independent representative of such limited partner, member or other beneficial owner:
(A) By a Qualified Custodian. If the account statement is sent by a qualified custodian, the investment adviser shall have a reasonable basis for believing that the qualified custodian sends an account statement at least quarterly to each of the investment adviser's clients for whom the qualified custodian maintains funds or securities. The account statement shall identify the amount of funds and the amount of each security in the account at the end of the period and shall set forth all transactions in the account during that period; or
(B) By the Adviser. If the investment adviser sends account statements to clients:
(1) The investment adviser shall send a quarterly account statement at least quarterly to each client for whom the investment adviser has custody of funds or securities. The account statement shall identify the amount of funds and the amount of each security of which the investment adviser has custody at the end of the period and shall set forth all transactions during that period;
(2) An independent certified public accountant shall verify all client funds and securities by actual examination at least once during each calendar year at a time chosen by the accountant without prior notice or announcement to the investment adviser and that is irregular from year to year, and shall file a copy of the auditor's report and financial statements with the Commissioner within 30 days after the completion of the examination, along with a letter stating that it has examined the funds and securities and describing the nature and extent of the examination; and
(3) The independent certified public accountant, upon finding any material discrepancies during the course of the examination, shall notify the Commissioner within one business day of the finding, by means of a facsimile transmission or electronic mail, followed by first class mail, directed to the Commissioner.
(ii) Exemption for Limited Partnerships Subject to Annual Audit. An investment adviser registered or required to be registered under the Act is not required to comply with the account statement requirement in paragraph 3(d)(i) of this Order with respect to the account of a limited partnership, limited liability company or another type of pooled investment vehicle that is subject to audit at least annually and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners, members or other beneficial owners within 120 days of the end of its fiscal year or, in the case of a fund of funds, within 180 days of the end of its fiscal year. The investment adviser shall notify the Commissioner in writing on Form ADV that the investment adviser intends to employ the audit safeguards described in this paragraph.
(e) Client Designation of Independent Representative. A client may designate an independent representative to receive, on the client's behalf, the notices and account statements required under paragraphs 3(c) and 3(d) of this Order.
(f) Direct Fee Deduction. An investment adviser having custody by virtue of having fees directly deducted from client accounts shall also provide the following safeguards:
(i) Written Authorization. The investment adviser shall obtain written authorization from the client to deduct advisory fees from the account held with the qualified custodian.
(ii) Notice of Fee Deduction. Each time a fee is directly deducted from a client account, the investment adviser shall concurrently:
(A) Send the qualified custodian notice of the amount of the fee to be deducted from the client's account; and
(B) Send the client an invoice itemizing the fee. The itemization shall include the formula used to calculate the fee, the amount of assets under management upon which the fee is based and the time period covered by the fee.
(iii) Notice of Safeguards. The investment adviser shall notify the Commissioner in writing on Form ADV that the investment adviser intends to use the safeguards described in paragraph 3(f) of this Order.
(g) Additional Requirements for Pooled Investments. Unless excepted under paragraph 4 of this Order, an investment adviser having custody by virtue of its acting in a capacity, such as general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust, that gives the investment adviser or its investment adviser agent legal ownership of or access to client funds or securities, shall comply with the additional requirements in this paragraph:
(i) Engagement of Independent Party. The investment adviser shall hire an independent party to review all fees, expenses and capital withdrawals from the pooled accounts.
(ii) Review of Fees. The investment adviser shall send all invoices or receipts to the independent party, detailing the amount of the fee, expenses or capital withdrawal and the calculation method such that the independent party can
(A) determine that the payment is in accordance with the pooled investment vehicle standards as described in such instruments as the partnership agreement or the membership agreement; and (B) forward approval for payment of the invoice to the qualified custodian with a copy to the investment adviser.
(iii) Notice of Safeguards. The investment adviser shall notify the Commissioner in writing on Form ADV that the investment adviser intends to use the safeguards described in paragraph 3(g) of this Order.
4. Exceptions.
(a) Certain Privately Offered Securities. An investment adviser registered or required to be registered under the Act need not comply with the custody requirements of this Order or Section 36b-31-5b of the Regulations with respect to securities that are:
(i) Acquired from the issuer in a transaction or chain of transactions not involving any public offering;
(ii) Uncertificated and ownership thereof is recorded only on books of the issuer or its transfer agent in the name of the client; and
(iii) Transferable only with the prior consent of the issuer or the holders of the outstanding securities of the issuer.
(b) Limited Partnerships Subject to Annual Audit. The exception in paragraph 4(a) of this Order is available with respect to securities held for the account of a limited partnership, limited liability company or other type of pooled investment vehicle only if the limited partnership, limited liability company or other type of pooled investment vehicle is audited, the audited financial statements are distributed as described in paragraph 3(d)(ii) of this Order and the investment adviser notifies the Commissioner in writing on Form ADV that the investment adviser intends to provide audited financial statements as described in this paragraph.
(c) Registered Investment Companies. An investment adviser registered or required to be registered under the Act need not comply with the custody requirements of this Order or Section 36b-31-5b of the Regulations with respect to the account of an investment company registered under the Investment Company Act of 1940, 15 U.S.C. 80a-1 to 80a-64, inclusive.
(d) Beneficial Trusts. An investment adviser registered or required to be registered under the Act need not comply with the custody requirements of this Order or Section 36b-31-5b of the Regulations if the investment adviser has custody because it is the trustee for a beneficial trust, provided that all of the following conditions are met for each trust:
(i) The beneficial owner of the trust is a parent, grandparent, spouse, sibling, child or grandchild of the investment adviser. Such relationships shall include "step" relationships; an
(ii) For each account described in paragraph 4(d)(i) of this Order, the investment adviser:
(A) Provides a written statement to each beneficial owner of the account describing the requirements in paragraph 3 of this Order or Section 36b-31-5b of the Regulations, as the case may be, and the reasons why the investment adviser will not be complying with such requirements;
(B) The investment adviser obtains from each beneficial owner a signed, dated statement acknowledging receipt of the written statement described in paragraph 4(d)(ii)(A) of this Order; and
(C) The investment adviser maintains a copy of the written statement and acknowledgement described in paragraphs 4(d)(ii)(A) and 4(d)(ii)(B) of this Order until the account is closed or the investment adviser is no longer trustee.
5. This Order shall remain in effect until modified, superseded or vacated by the Commissioner or other lawful authority.
So ordered at Hartford, Connecticut 
this 4th day of February 2005.
John P. Burke
Banking Commissioner

Investment Advisory Code of Ethics

Summary

By January 7, 2005, all investment advisers registered with the Securities and Exchange Commission ("SEC") must comply with new Rule 204A-1 under the Investment Advisers Act of 1940 (the "Advisers Act") and keep related books and records under amended Rule 204-2 (Final Rule: Investment Adviser Code of Ethics; Release No. IA-2256, File No. S7-04-04, 7/2/04). The Division has received several inquiries concerning the extent to which the new rule and related recordkeeping requirements apply to investment advisers registered under the Connecticut Uniform Securities Act ("CUSA").

Although CUSA and its Regulations do not require that state-registered investment advisers prepare a separate code of ethics, ethical concerns should be integrated into a state-registered investment adviser's supervisory and compliance procedures as well as its business operations as more fully discussed in this policy statement.

Discussion: SEC Rule 204A-1 and its Impact on State-Registered Investment Advisers

SEC Rule 204A-1 contains a basic code of ethics requirement and more specific internal reporting and operational requirements that SEC-registered investment advisers must observe to prevent conflicts of interest. Correspondingly, amendments to SEC Rule 204-2(a) require SEC-registered investment advisers to retain as required records a copy of their code of ethics; records concerning code of ethics violations and their disposition; records concerning personal securities transactions by certain advisory personnel; and evidence in the form of an acknowledgement that supervised persons received a copy of the code of ethics.

The Basic Code of Ethics Requirement

Rule 204A-1 requires SEC-registered investment adviser to establish, maintain and enforce a written code of ethics containing, at a minimum, a standard of business conduct that the adviser requires of its "supervised persons" as defined in Section 202(a)(25) of the Advisers Act, and retain the code of ethics as a required record under amended Rule 204-2(a). The standard must reflect the investment adviser's fiduciary obligations and those of its supervised persons. In the implementing release, the SEC noted that: "The rule does not require the adviser to adopt a particular standard" and that "[a]dvisers are free to set higher standards for their employees, such as those established by professional or trade groups" such as the Financial Planning Association, the Association for Investment Management and Research, the Certified Financial Planner Board of Standards, the Investment Counsel Association of America and the American Institute of Certified Public Accountants (Release, at n. 6) In addition, the implementing release pointed out that the code of ethics "should be more than a compliance manual" and should "set out ideals for ethical conduct premised on fundamental principles of openness, integrity, honesty and trust." The rule also requires that supervised persons comply with applicable federal securities laws such as the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the Investment Company Act of 1940, the Advisers Act, Title V of the Gramm-Leach-Bliley Act, and the Bank Secrecy Act.

Neither CUSA nor its Regulations contain an express requirement that Connecticut-registered investment adviser prepare a separate, written code of ethics and the department is not mandating that one be prepared at this time. However, laced throughout CUSA and its Regulations are several proscriptions against unethical conduct. Section 36b-5(f) of CUSA prohibits persons receiving compensation or other remuneration for advisory or solicitation services from engaging in "any dishonest or unethical practice in connection with the rendering of such advice or in connection with such solicitation." Under Section 36b-15(a)(2)(H) of CUSA, an investment advisory registration may be revoked, suspended or restricted if the registrant has "engaged in dishonest or unethical practices in the securities or commodities business." Section 36b-31-15c of the Regulations provides examples of misconduct deemed to be dishonest or unethical for purposes of Section 36b-15(a)(2)(H) of CUSA. Section 36b-27(a) of CUSA permits the Commissioner to, among other things, issue a cease and desist order and require restitution and disgorgement upon a finding that the respondent "engaged in a dishonest or unethical practice in the securities or commodities business." To avoid running afoul of these prohibitions, the Division would encourage state-registered investment advisers to incorporate ethical considerations into their existing compliance/supervisory materials and, most important, communicate those considerations to investment adviser agents on a regular basis.

Internal Reporting of Personal Securities Transactions

SEC Rule 204A-1 requires that "access persons" report their personal securities transactions to the SEC-registered investment adviser and that the investment adviser review those transactions. An "access person" is a "supervised person" 1) having access to nonpublic information about the portfolio holdings of any "reportable fund" (i.e. a fund for which the investment adviser served as investment adviser or a fund whose adviser or principal underwriter controls the investment adviser, is controlled by the investment adviser or is under common control with the investment adviser); 2) involved in making client securities recommendations; or 3) having access to nonpublic client securities recommendations. Directors, officers and partners of the investment adviser are presumptively "access persons."

There are two types of reports that access persons must prepare under SEC Rule 204A-1: 1) a "Holdings Report" and 2) a "Transaction Report." Neither report is required for securities held in accounts over which the access person had no direct or indirect influence or control.

The Holdings Report covers the access person's current securities holdings. The report must be submitted to the chief compliance officer or other designated person 1) no later than 10 days after the person becomes an access person; and 2) at least once each twelve month period thereafter on a date selected by the SEC-registered investment adviser. The Holdings Report contains information on the title and type of securities; as applicable, the exchange ticker symbol or CUSIP number; the number of shares; the principal amount of each reportable security in which the access person has any direct or indirect beneficial ownership; the name of any broker, dealer or bank with whom the access person maintains an account in which any securities are held for the access person's direct or indirect benefit; and the date the access person submits the report.

The Transaction Report covers "reportable securities" in which the access person had (or, as a result of the transaction acquired) any direct or indirect beneficial ownership. The term "reportable securities" does not include direct obligations of the U.S. government; bankers' acceptances; bank CDs; commercial paper; high quality short-term debt instruments, including repurchase agreements; shares issued by money market funds; shares issued by open-end funds other than "reportable funds" (i.e. those with whom the investment adviser had an affiliation as described elsewhere in the rule); and shares issued by unit investment trusts that are invested exclusively in one or more open-end funds, none of which are "reportable funds." In addition, Transaction Reports do not have to be filed for: 1) transactions effected pursuant to an automatic investment plan such as a dividend reinvestment plan; or 2) if the report would duplicate information in broker trade confirmations or account statements that the investment adviser holds in its records, provided that the investment adviser receives the confirmations or statements no later than 30 days after the end of the applicable calendar quarter. Transaction reports must be submitted to the chief compliance officer or other designated person quarterly and within 30 days after each calendar quarter ends. The report covers transactions occurring during the quarter and includes: the date of the transaction; the title of the reportable security; as applicable, the exchange ticker symbol or CUSIP number; the interest rate; the maturity date; the number of shares; the principal amount of each reportable security involved; the nature of the transaction (purchase; sale; any other type of acquisition or disposition); the price of the security at which the transaction was effected; the name of the broker, dealer or bank with or through whom the transaction was effected; and the date the access person submits the report.

Insofar as personal securities transactions are concerned, CUSA and its Regulations do not impose formal internal reporting or review requirements as does SEC Rule 204A-1. This is not to say, however, that firms should not develop a mechanism for addressing personal securities transactions. In the Division's online description of its Investment Adviser Examination Program, records of personal securities transactions are specifically listed as being subject to review during a Division examination. Moreover, in outlining typical examination deficiencies, the Division noted that an investment adviser's compliance/supervision manual "should encompass all aspects of the business such as . . . the disclosure of any conflicts of interest, the review of personal securities transactions, and any other items that are necessary to have procedures that ensure compliance with the various securities laws."

While the SEC did not prescribe specific requirements for an adviser's code of ethics insofar as personal transactions and other matters are concerned, the implementing release mentioned the following which may assist state-registered advisers in addressing ethical concerns:

1. Requiring prior written approval from the firm before a personal securities transaction can be placed
2. Maintaining a list of securities issuers that the adviser is recommending for client transactions and prohibiting personal trading in securities of those issuers
3. Maintaining a "restricted list" of issuers about whom the adviser has inside information, and prohibiting any trading (personal or for clients) in securities of those issuers
4. Prohibiting advisory personnel from placing personal securities transactions during "blackout periods" corresponding to when client securities trades are being placed or recommendations are being made
5. Reminding advisory personnel that investment opportunities must first be offered to clients before the adviser or its personnel may act on them.
6. Prohibiting or restricting market timing or "short-swing" trading
7. Requiring trading by advisory personnel only through certain broker-dealers, or limiting the number of brokerage accounts permitted
8. Providing the investment adviser with duplicate trade confirmations and account statements
9. Assign new securities analyses to employees whose personal holdings do not present apparent conflicts of interest.
10. Limiting the acceptance of gifts by advisory personnel

Pre-approval of Participation in an IPO or Limited Offering

SEC Rule 204A-1 requires that access persons obtain the investment adviser's approval before they directly or indirectly acquire beneficial ownership in any securities in either an initial public offering ("IPO") or a limited offering.

Neither CUSA nor its Regulations expressly require that preapproval be obtained for IPOs and limited offerings. However, state-registered investment advisers should be mindful that an investment adviser agent's participation in an IPO or limited offering may be disadvantageous to the client and present a conflict of interest.

"Whistleblower" Provision

SEC Rule 204A-1 requires that all supervised persons report any violation of the investment adviser's code of ethics promptly to the firm's chief compliance officer. If another person is designated to receive the report in lieu of the compliance officer, the compliance officer must also receive a report of the violation so that he or she is not circumvented in the reporting process. Whistleblower records are not required records under revised SEC Rule 204-2(a).

CUSA and its Regulations do not contain a "whistleblower" provision.

Internal Dissemination of Code

SEC Rule 204A-1 requires that each SEC-registered investment adviser provide each supervised person with a copy of the adviser's code of ethics and any amendments to the code. Supervised persons must, in turn, provide the investment adviser with a written acknowledgement that they have received a copy of the code of ethics, including amendments.

Although CUSA and its Regulations do not require that state-registered investment advisers prepare a separate code of ethics, ethical concerns should be incorporated into the firm's supervisory and compliance procedures. Section 36b-31-6f of the Regulations obligates each investment adviser to amend its written supervisory procedures as appropriate within a reasonable time after relevant changes occur and communicate the amendments throughout its organization.

Form ADV Amendments

As part of its adoption of new Rule 204A-1, the SEC announced an amendment to Part II, Item 9 of Form ADV. The change would require investment advisers to describe on Schedule F their code of ethics and indicate that they would provide a copy to any client or prospective client upon request. In describing the change, the implementing release noted: "We expect few clients will request a copy of the code, and that the cost to provide it will be minimal."

The Division notes that the codes of ethics to which some state-registered investment advisers adhere by virtue of their status as certified public accountants or members of certain financial planning professional organizations should be readily available to prospective clients and clients should a request be made. In incorporating ethical principles into their supervisory/compliance manuals, other investment advisers may wish to consider preparing, on a voluntary basis, a client document that summarizes the adviser's ethical restrictions and business values.

February 2005


Compliance Programs of State-Registered Investment Advisers in the Wake of New Federal Requirements

New SEC Rule 206(4)-7

By October 5, 2004, all investment advisers registered with the Securities and Exchange Commission ("SEC") must comply with new Rule 206(4)-7 under the Investment Advisers Act of 1940 (the "Advisers Act") (Final Rule: Compliance Programs of Investment Companies and Investment Advisers; Release No. IA-2204, File No. S7-03-03, 12/17/03). The new rule was promulgated under Section 206(4) of the Advisers Act, which prohibits any act, practice or course of business that is fraudulent, deceptive or manipulative. Rule 206(4)-7 requires SEC-registered investment advisers to: 1) adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules by the investment adviser and its supervised persons; 2) at least annually, review the adequacies of those policies and procedures and the effectiveness of their implementation; and 3) designate an individual, who must be a supervised person, to be responsible for administering the policies and procedures.

Correspondingly, SEC Rule 204-2, concerning the maintenance of books and records by federally registered investment advisers, was amended to require firms to maintain 1) copies of all policies and procedures formulated under Rule 206(4)-7 that are in effect or were in effect over the previous five years; and 2) any records documenting the investment adviser's annual review of those policies and procedures as required by Rule 204(6)-7(b).

Connecticut's Response

The Division has received several inquiries concerning how the SEC's new compliance procedure requirement would affect investment advisers registered with the department under the Connecticut Uniform Securities Act ("CUSA").

Given Connecticut's existing regulatory structure, the department is not promulgating an additional regulation to mirror new SEC Rule 206(4)-7 at this time. State-registered investment advisers are reminded, however, that the implementation of comprehensive supervisory procedures goes a long way toward minimizing business risks and preventing dishonest or unethical practices, including material conflicts of interest and the misappropriation of client assets.

Section 36b-31-6f(b) of the Regulations under CUSA provides that: "Each registered . . . investment adviser shall establish, enforce and maintain a system for supervising the activities of its . . . investment adviser agents and Connecticut office operations that is reasonably designed to achieve compliance with applicable securities laws and regulations."

Section 36b-31-6f of the Regulations requires that, at a minimum, the supervisory system provide for the following:

1. The establishment, implementation and maintenance of written supervisory procedures containing:
  • The supervisory system established by the investment adviser
  • The titles, registration status and location of required supervisory personnel
  • The locations of required supervisory personnel
  • The responsibilities of each supervisory person as they relate to the type of business in which the investment adviser is engaged
  • An internal record containing the names of all persons designated as supervisory personnel and the dates on which such designation is or was effective
  • Consideration of whether investment adviser agents at the location engage in retail sales or other activities involving regular contact with public customers or clients
  • Consideration of whether a substantial number of investment adviser agents conduct activities at or are otherwise supervised from the location
  • Consideration of whether the investment adviser agents are geographically dispersed
  • Consideration of whether the securities or investment advisory activities are diverse, complex or both.
2. Designation of a manager with authority to carry out supervisory responsibilities for each type of business in which the investment adviser engages and for which investment adviser registration is required
3. Designation of an on-site, full-time manager for each Connecticut branch office and principal place of business to be responsible for the day-to-day operation and supervision of the office
4. Assignment of each investment adviser agent to a supervising manager
5. Reasonable efforts to determine that all supervisory personnel have the experience or training to carry out their assigned responsibilities
6. Participation, at least annually, by each investment adviser agent, either individually or collectively, in an interview or meeting conducted by persons the investment adviser designates. During this interview or meeting, compliance matters relevant to the adviser agent's activities must be discussed. The meeting or interview may occur in conjunction with a discussion of other matters and may be conducted at a central or regional location or at the investment adviser agent's place of business.
7. Designation of one or more managers to review the supervisory system, procedures and inspections implemented by the investment adviser and take or recommend to senior management appropriate action reasonably designed to achieve compliance with CUSA and its Regulations. Unlike Rule 206(4)-7, there is no express requirement in the Connecticut regulations that this review occur at a specified time (i.e. at least annually).

In addition, Section 36b-31-6f obligates each investment adviser to amend its written supervisory procedures as appropriate within a reasonable time after changes occur in 1) applicable securities laws and regulations; and 2) the investment adviser's supervisory system. The adviser must also communicate the amendments through its organization.

The failure of an investment adviser to supervise its investment adviser agents is a basis for revoking, suspending or restricting an investment advisory registration under Section 36b-15(a)(2)(K) of CUSA. State-registered investment advisers should also bear in mind that the implementation of comprehensive supervisory procedures helps to minimize business risks. For small advisers in particular, business continuity planning covering contingencies such as an adviser's incapacity or death is important. In addition, procedures should provide safeguards against dishonest or unethical practices, including material conflicts of interest and the misappropriation of client assets.

In conducting examinations of investment advisory books and records, the Division will review the investment adviser's compliance manual, among other records. For additional guidance on the examination process, including required books and records, see Investment Adviser Examination Program.

February, 2005


Enforcement Highlights

ADMINISTRATIVE ACTIONS

James Arthur Wilson, Sr. (CRD # 801265) - Notice of Intent to Revoke Registration as Agent Issued Based on Alleged Prior Criminal Conviction

On December 7, 2004, the Banking Commissioner issued a Notice of Intent to Revoke Registration as Agent with respect to James Arthur Wilson, Sr. of Newburgh, New York (Docket No. NR-2004-7068-S). The respondent is registered under the Connecticut Uniform Securities Act as a broker-dealer agent of Ormes Capital Markets, Inc. The action alleged that, on February 10, 2004, in New York Superior Court, County Court of Orange County, the respondent was convicted by plea of grand larceny in the fourth degree, a class E felony under New York law, for stealing $5,265 in unemployment benefits from the New York State Department of Labor, and was sentenced to pay $5,265 in restitution. The action also recited that, on or about February 2, 2004, and prior to sentencing, the respondent paid restitution in full. The respondent was afforded an opportunity to request a hearing on the Notice of Intent to Revoke Registration as Agent.

Anthony John Catinella - Order to Cease and Desist and Notice of Intent to Fine Issued

On December 2, 2004, the Banking Commissioner entered an Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2004-7115-S) against Anthony John Catinella of 3097 NW 72nd Avenue, Margate, Florida. The action alleged that, during August 2003, the respondent 1) violated Section 36b-16 of the Connecticut Uniform Securities Act by offering unregistered non-exempt securities of Care Concepts, Inc. to at least one Connecticut person; and 2) transacted business as an unregistered broker-dealer agent of Richmark Capital Corporation (CRD number 43162) in contravention of Section 36b-6(a) of the Act. Since the respondent did not request a hearing on the Order to Cease and Desist within the time prescribed, the Order to Cease and Desist became permanent on January 11, 2005. A hearing on the Notice of Intent to Fine is pending.

Richmark Capital Corporation (CRD # 43162) - Notice of Intent to Revoke Registration as Broker-dealer and Notice of Intent to Fine Issued

On December 2, 2004, the Banking Commissioner entered a Notice of Intent to Revoke Registration as Broker-dealer, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. RF-2004-7106-S) with respect to Richmark Capital Corporation, a registered broker-dealer having its principal office at 5525 North MacArthur Boulevard, Suite 615, Irving, Texas. The action alleged that the respondent 1) wilfully violated Section 36b-6(b) of the Connecticut Uniform Securities Act by employing at least two unregistered broker-dealer agents; 2) engaged in dishonest or unethical practices in the securities business by executing transactions on behalf of customers without authority to do so, and exercising discretionary power in effecting customer transactions without first obtaining written discretionary authority from the customers; 3) wilfully violated Section 36b-16 of the Act by offering unregistered non-exempt securities of Care Concepts, Inc. to at least one Connecticut person; 4) violated Section 36b-31-14a(a) of the Regulations under the Act by failing to keep accurate books and records concerning the representatives assigned to Connecticut accounts; and 5) wilfully violated Section 36b-31-6f(b) of the Regulations under the Act by failing to establish, enforce and maintain an adequate supervisory system.

The respondent was afforded an opportunity to request a hearing on the Notice of Intent to Revoke Registration as Broker-dealer. A hearing on the Notice of Intent to Fine is pending.

Dean Russel Baker (CRD # 4493790) - Agent Registration Revoked

On November 23, 2004, the Banking Commissioner entered an Order revoking the broker-dealer agent registration of Dean Russel Baker (Docket No. RF-2004-6974-S) of Oakland Park, Florida. Dean Russel Baker had been associated with LH Ross & Company, Inc. (CRD number 37920), a securities brokerage firm located at 2255 Glades Road, Suite 425W, Boca Raton, Florida. The respondent had been the subject of a July 19, 2004 Notice of Intent to Revoke Registration as Agent and Notice of Intent to Fine (Docket No. RF-2004-6974-S) alleging that from at least June 2002 through November 2003, the respondent 1) engaged in unauthorized trading; 2) failed to obtain written discretionary trading authority from customers where required by law to do so; and 3) failed to provide Connecticut customers with the margin disclosure statement described in NASD Rule 2341(a). The July 19, 2004 Notice of Intent to Revoke Registration as Agent and Notice of Intent to Fine had also alleged that such conduct constituted a dishonest or unethical practice in the offer, sale or purchase of a security within the meaning of Section 36b-4(b) of the Connecticut Uniform Securities Act, and a basis for the initiation of administrative proceedings under Sections 36b-15(a)(2)(B) and 36b-15(a)(2)(H) of the Act.

In revoking the respondent's agent registration, the Commissioner found that the respondent had wilfully violated Section 36b-4(b) of the Connecticut Uniform Securities Act and had engaged in a dishonest or unethical practice in the securities business. The respondent did not appear or contest the revocation of his agent registration.

BMX Entertainment Corporation f/k/a BMX Entertainment, Inc. - Notice of Intent to Issue Stop Order Issued

On November 17, 2004, the Banking Commissioner issued a Notice of Intent to Issue Stop Order (Docket No. SO-2004-7088-S) denying effectiveness to the pending securities registration of BMX Entertainment Corporation. The respondent, located at 67 Smith Street, P.O. Box 10857, Stamford, Connecticut, purportedly is in the music recording and distribution business. The Notice of Intent to Issue Stop Order alleged that, notwithstanding more than one deficiency letter issued by agency staff, the registration statement remained materially incomplete in that, among other things, the issuer's disclosure document did not satisfy the requirements in the SCOR Issuer's Manual. The respondent was afforded an opportunity to request a hearing on the Notice of Intent to Issue Stop Order.


SETTLEMENTS

CONSENT ORDERS

Dean Russel Baker (CRD # 4493790) Fined $3,500 for Engaging in Dishonest or Unethical Practices

On December 1, 2004, the Banking Commissioner entered a Consent Order (Docket No. RF-2004-6974-S) resolving the allegations in a July 19, 2004 Notice of Intent to Fine against Dean Russel Baker of Oakland Park, Florida. On November 23, 2004, the Banking Commissioner had revoked the respondent's broker-dealer agent registration based upon findings that the respondent wilfully violated Section 36b-4(b) of the Connecticut Uniform Securities Act and had engaged in a dishonest or unethical practice in the securities business.

In entering the Consent Order, the Commissioner acknowledged that the respondent had submitted documentation demonstrating economic hardship such that the respondent was financially incapable of paying the maximum fine contemplated by the Notice of Intent to Fine. The Consent Order directed the respondent to pay a $3,500 fine to the agency in resolution of the matter and withdrew the July 19, 2004 Notice of Intent to Fine.

Steven Douglas Klein (CRD # 1940511) Barred from Conducting Securities Activity in Connecticut for Ten Years

On November 8, 2004, the Banking Commissioner entered a Consent Order (Docket No. CF-2004-6950-S) with respect to Steven Douglas Klein of 1549 August Road, North Babylon, New York. Respondent Klein had been the subject of a March 29, 2004 Order to Cease and Desist and Notice of Intent to Fine (Docket No. CF-2004-6950-S) alleging that 1) from at least October 1989 to September 23, 2003, the respondent was the president and 75% owner of Ameriprop, Inc., a broker-dealer; 2) in that capacity, the respondent was the authorized signatory on the Form BDW (Uniform Request for Broker-dealer Withdrawal) filed by Ameriprop, Inc. and on the Form U-5 (Uniform Termination Notice for Securities Industry Registration) filed by Ameriprop, Inc. and relating to respondent Klein's association with that firm; 3) in October 2003, the respondent filed a Form U-4 (Uniform Application for Securities Industry Registration or Transfer) to apply for registration as a broker-dealer agent of Seidel & Shaw, LLC; and 4) the respondent violated Section 36b-23 of the Connecticut Uniform Securities Act and Section 36b-31-14e(a) of the Regulations thereunder by failing to address in the filings a June 23, 2003 Notice of Opportunity for Hearing issued by the Georgia Commissioner of Securities against respondent Klein and Ameriprop, Inc. The Order to Cease and Desist, being uncontested, had become permanent on April 21, 2004.

The Consent Order resolved the allegations in the Notice of Intent to Fine. In entering the Consent Order, the Commissioner acknowledged that the respondent had demonstrated economic hardship such that the respondent was financially incapable of paying the maximum fine. The Consent Order barred the respondent for ten consecutive years from transacting business as a broker-dealer, investment adviser, agent or investment adviser agent in or from Connecticut, and from acting as a finder for compensation, splitting commissions, or receiving referral fees in connection with any recommendation, sale or purchase of securities. The Consent Order also required that the respondent reimburse the department $500 for investigative costs.

Wilder Douglas Carnes (CRD # 2891466) - Broker-dealer Agent Registration Suspended for Ten Business Days Following Sales of Hedge Fund Interests

On October 7, 2004, the Banking Commissioner entered a Consent Order (Docket No. CRF-2004-6420-S) with respect to Wilder Douglas Carnes of 150 A Hanover Road, Newtown, Connecticut. The respondent co-managed Criterion Investment Capital LLC, an entity that acted as the general partner of the Criterion Investment Fund I L.P., a Connecticut-based hedge fund. The respondent had been the subject of a February 5, 2004 Order to Cease and Desist, Notice of Intent to Revoke Registrations as Agent and Investment Adviser Agent and Notice of Intent to Fine alleging that, in connection with offers and sales of hedge fund interests effected from at least January 2001 to January 2002, the respondent violated the antifraud provisions in Section 36b-4 of the Connecticut Uniform Securities Act by 1) not disclosing that, contrary to representations made to prospective investors, hedge fund interests were being sold for less than $500,000 to non-accredited investors; 2) not disclosing that, although the offering circular represented that the hedge fund's objective was to achieve long term appreciation, the average investment was only 19 days in duration; 3) not disclosing that, contrary to representations made in the offering circular, hedge fund trading focused on options; and 4) failing to disclose the respondent's 1999 bankruptcy. In addition, the action had claimed that the respondent 1) violated Section 36b-31-14e(a) of the Regulations under the Act by failing to update his Form U-4 to disclose the department's pending investigation; and 2) contravened Section 36b-6(c) of the Act by transacting business as an unregistered investment adviser agent in conjunction with his hedge fund activities.

The Consent Order resolved the allegations in the February 5, 2004 Order to Cease and Desist, Notice of Intent to Revoke Registrations as Agent and Investment Adviser Agent and Notice of Intent to Fine. In entering into the Consent Order, the Commissioner acknowledged that the respondent had demonstrated economic hardship such that the respondent was financially incapable of paying a fine, and that the respondent had not been employed in the securities industry since June 30, 2004. Although the respondent applied for registration as a broker-dealer agent of Source Capital, Inc. on July 20, 2004, that registration had not been made effective as of the date the Consent Order was entered. In entering the Consent Order, the Commissioner also found that the respondent 1) violated Section 36b-31-14e(a) of the Regulations under the Connecticut Uniform Securities Act by failing to promptly file a correcting amendment to his Form U-4; and 2) violated Section 36b-6(c) of the Act by transacting business as an investment adviser agent while unregistered.

Pursuant to the Consent Order, the respondent's agent registration, which became effective on October 8, 2004, was suspended for ten business days. The Consent Order also obligated the respondent to cooperate with the Division in its investigation of Criterion Investment Fund I L.P. and Criterion Investment Capital LLC.

Martin Scott Sands (CRD # 1186904) - Consent Order Conditioning Registration as an Investment Adviser Agent and Restricting Securities-Related Activities Entered

On November 29, 2004, the Banking Commissioner entered a Consent Order (No. CO-04-7093-S) conditioning the investment adviser agent registration of Martin Scott Sands and restricting Martin Sands' securities-related activities. Sands had applied for Connecticut registration as an investment adviser agent of Sands Brothers Asset Management LLC, an SEC-registered investment adviser. Sands is also registered as a broker-dealer agent of Sands Brothers & Co., Ltd. and Sands Brothers International Ltd. under the Connecticut Uniform Securities Act. All three entities are affiliated. The Consent Order was based on allegations that Sands had been subject to a December 18, 2003 bar and an October 2000 suspension by the New York Stock Exchange.

The Consent Order required that during Sands' association with Sands Brothers Asset Management LLC, Sands Brothers & Co., Ltd. and/or Sands Brothers International Ltd., 1) Sands would refrain, for 72 hours following any securities recommendation he made to a customer or client or following any purchase or sale effected on behalf of a customer or client by Sands, from buying or selling any security being recommended, purchased or sold to the client by or through Sands' efforts; 2) Sands would not, directly or through intermediary accounts, buy or sell any security for 72 hours after Sands received oral or written notice that any of the firms would be modifying any recommendation concerning the advisability of investing in, purchasing or selling such security; 3) Sands would be subject to the direct supervision of a principal or other employee of higher grade; and 4) the chief compliance of officer of each firm would approve any trading in Sands' personal accounts and those of his immediate family. Sands Brothers Asset Management LLC, Sands Brothers & Co., Ltd. and Sands Brothers International Ltd. concurred with these restrictions on Sands' activities by signing the Consent Order. The Consent Order also required that, for two years, quarterly reports concerning any securities-related complaints, actions or proceedings involving Sands be filed with the department. The Consent Order also placed Sands on administrative probation for two years.

Martin Scott Sands became registered as an investment adviser agent of Sands Brothers Asset Management LLC in Connecticut on November 29, 2004.

Donald Barton (CRD # 1304356) Fined $5,000 for Engaging in Private Securities Transactions; Acting as Unregistered Agent of Issuer

On November 22, 2004, the Banking Commissioner entered a Consent Order (Docket No. CO-04-7048-S) with respect to Donald Barton, a registered broker-dealer agent of Harvest Capital, LLC (CRD # 35723). The Consent Order alleged that from approximately June 2002 to September 2003, Donald Barton engaged in private securities transactions in violation of Section 36b-31-6e of the Regulations under the Connecticut Uniform Securities Act and transacted business as an unregistered agent of issuer of Intrust Advisors Multi-Manager Fund, L.P. in violation of Section 36b-6(a) of the Act. The Consent Order directed Donald Barton to cease and desist from regulatory violations; fined him $5,000; and required that he reimburse the department up to $1,000 for expenses incurred in connection with one or more examinations of his office to be conducted within 24 months following the entry of the Consent Order.


STIPULATION AND AGREEMENTS

Lydian Asset Management, L.P. (CRD # 108024) Assessed $1,800 for Delinquent Investment Advisory Notice Filing; Lydian Global Opportunities Partners L.P. Fined $1,500 for Late Rule 506 Notice Filing

On October 18, 2004, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-04-7037-S) with Lydian Asset Management, L.P., an SEC-regulated investment adviser located at 495 Post Road East, Westport, Connecticut and its affiliate, Lydian Global Opportunities Partners L.P. of the same address. The Stipulation and Agreement alleged that, from July 2001 until June 7, 2004, when a notice was filed, Lydian Asset Management, L.P. failed to make the investment advisory notice filing required by Section 36b-6(e) of the Connecticut Uniform Securities Act. The Stipulation and Agreement also alleged that Lydian Global Opportunities Partners L.P., an issuer of securities, had been approximately fifteen months late in making a Rule 506 notice filing under the Act in conjunction with sales of partnership interests.

In resolution of the matter, Lydian Asset Management, L.P. agreed to pay $1,800 to the department. Of that amount, $1,500 constituted an administrative fine, and $300 constituted reimbursement for past due notice filing fees. In addition, Lydian Global Opportunities Partners L.P. agreed to pay a $1,500 fine.

Broker/Dealer, Inc. (CRD # 16589) Fined $1,500 for Unregistered Activity

On November 30, 2004, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-04-7112) with Broker/Dealer, Inc. of 2675 North Mayfair Road, Suite 410, Milwaukee, Wisconsin. The Stipulation and Agreement claimed that from approximately March 2004 until May 2004, the firm transacted business as a broker-dealer absent registration by selling securities in a private placement to three Connecticut accredited investors. The Stipulation and Agreement also claimed that the firm employed an unregistered agent. Both the firm and the agent, neither of whom have any reported disciplinary history, have since become registered under the Connecticut Uniform Securities Act. Pursuant to the Stipulation and Agreement, the firm agreed to revise and implement supervisory and compliance procedures designed to prevent regulatory violations and to pay a $1,500 fine to the department.


STATISTICAL SUMMARY

Licensing At A Glance 1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Broker-dealers Registered 2,526 2,550 2,587 2,553
Broker-dealer Agents Registered  112,749 115,532 117,862 113,121
Broker-dealer Branch Offices Registered 2,230 2,275 2,288 2,389
Investment Advisers Registered 412 424 427 431
SEC Registered Advisers Filing Notice 1,342 1,375 1,410 1,384
Investment Adviser Agents Registered 6,179 6,344 6,415 6,380
Investment Advisory Branch Offices Registered 175 163 157 157
Agents of Issuer Registered  68 66 66 73
All Totals are End of Quarter

 

  1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Securities and
Business Opportunity Filings
Offerings Reviewed 55 77 53 51 236
Investment Company Notice Filings 732 227 254 6,490 7,703
Exemptions and Exemptive Notices 694 676 641 678 2,689
{ }
Examinations
Broker-dealers 11 3 0 15 29
Investment Advisers 3 0 0 0 3
{ }
Securities Investigations
Opened 61 56 46 32 195
Closed 57 29 37 57 180
Ongoing as of September 30, 2004 109 131 81 101
Subpoenas issued 21 12 10 6 49
Cases referred from Attorney General 6 1 1 5 13
Cases referred from Other Agencies 1 6 0 1 8
{ }
Business Opportunity Investigations
Investigations Opened 8 6 3 3 20
Investigations Closed 7 3 2 5 17
Ongoing as of September 30, 2004 10 12 4 16
{ }
Securities Enforcement:
Remedies and Sanctions
Notices of Intent to Deny (Licensing) 2 0 0 0 2
Notices of Intent to Suspend (Licensing) 0 0 0 0 0
Notices of Intent to Revoke (Licensing) 3 2 1 2 8
Denial Orders (Licensing) 2 1 0 0 3
Suspension Orders (Licensing) 0 0 0 1 1
Revocation Orders (Licensing) 0 2 1 1 4
Notices of Intent to Fine 7 2 1 2 12
Orders Imposing Fine 5 0 3 0 8
Cease and Desist Orders 8 2 3 2 15
Notices of Intent to Issue Stop Order 0 0 0 1 1
Activity Restrictions/Bars 3 4 2 2 11
Stop Orders 2 0 0 0 2
Vacating/Withdrawal Orders 2 3 0 1 6
Censures 0 0 0 0 0
Formal Orders of Restitution 0 0 0 0 0
Cancellation Orders 0 0 0 0 0
{ }
Proceedings and Settlements
Administrative Actions 17 6 5 5 33
Consent Orders 5 3 5 5 18
Stipulation and Agreements 5 3 8 2 18
{ }
Monetary Relief
Monetary Sanctions Imposed $ 282,100 $13,000 $229,650 $13,800 $ 538,550
Restitution or Other Monetary Relief $ 81,880 $4,014,406 $41,082 $75,210 $4,212,578
{ } (includes Rescission Offer Amounts; rounded to nearest dollar)
{ }
Securities Referrals
Criminal (Chief State's Attorney) 0 0 0 0 0
Criminal Matters, Including Referrals (Other) 0 0 0 3 3
Civil (Attorney General) 0 2 0 0 2
Other Agency Referrals 0 0 2 1 3
* Corrected to add new category 7/2005.

Securities Division