Title 21 VAC — Securities and Retail Franchising

Agency 5 State Corporation Commission, Division of Securities And Retail Franchising

Chapter 20 Broker-Dealers, Broker-Dealer Agents and Agents of the Issuer

Part I Broker-Dealers

21VAC5-20-10 Application for registration as a broker-dealer

A. Application for registration as a broker-dealer by a FINRA member shall be filed in compliance with all requirements of CRD and in full compliance with forms and regulations prescribed by the commission and shall include all information required by such forms.

B. An application shall be deemed incomplete for registration as a broker-dealer by a FINRA member unless the applicant submits the following executed forms, fee, and information:

Form BD.
Statutory fee payable to FINRA in the amount of $200 pursuant to § 13.1-505 F of the Act.
Evidence of approved FINRA membership.
Evidence of at least one qualified agent registration pending on CRD.
Any other information the commission may require.

C. Application for registration for any non-FINRA member broker-dealer shall be filed with the commission at its Division of Securities and Retail Franchising or such other entity designated by the commission on and in full compliance with forms prescribed by the commission and shall include all information required by such forms.

D. An application shall be deemed incomplete for registration as a non-FINRA member broker-dealer unless the applicant submits the following executed forms, fee, and information to the commission:

Form BD.
Statutory fee payable to the Treasurer of Virginia in the amount of $200 pursuant to § 13.1-505 F of the Act.
Financial statements required by 21VAC5-20-80.
Evidence of exam requirements for principals required by 21VAC5-20-70.
Evidence of at least one qualified individual with an agent registration pending with the division on behalf of the broker-dealer.
Any other information the commission may require.

E. The commission shall either grant or deny each application for registration within 30 days after it is filed. However, if additional time is needed to obtain or verify information regarding the application, the commission may extend such period as much as 90 days by giving written notice to the applicant. No more than three such extensions may be made by the commission on any one application. An extension of the initial 30-day period, not to exceed 90 days, shall be granted upon written request of the applicant.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 200, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC890040, eff. July 1, 1989; Case No. SEC900034, eff. July 1, 1990; Virginia Register Volume 14, Issue 22, eff. July 1, 1998; Volume 15, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-20 Expiration

A broker-dealer's registration, and any renewal thereof, shall expire annually at midnight on the 31st day of December, unless renewed in accordance with 21VAC5-20-30.

History

Statutory Authority: § 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 201, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. October 5, 1984; Case No. SEC890040, eff. July 1, 1989.

21VAC5-20-30 Renewals

A. To renew its registration, a FINRA member broker-dealer will be billed by CRD the statutory fee of $200 prior to the annual expiration date. A registration renewal shall be granted as a matter of course upon payment of the proper fee unless the registration was, or the renewal would be, subject to revocation under § 13.1-506 or nonrenewal under § 13.1-505 E.

B. Any non-FINRA broker-dealer shall file with the commission at its Division of Securities and Retail Franchising the following items at least 30 days prior to the expiration of registration:

Application for Renewal of a Broker-Dealer's Registration (Form S.A.2) accompanied by the statutory fee of $200.
Financial Statements:

a. The most recent certified financial statements prepared by an independent accountant in accordance with generally accepted accounting principles, as promulgated by the American Institute of Certified Public Accountants. "Certified Financial Statements," "Financial Statements" and "Independent Accountant" shall have the same definition as those terms are defined under subsection B of 21VAC5-20-80.

b. If the most recent certified financial statements precede the date of renewal by more than 120 days, the registrant must submit the certified financial statements required by subdivision 2 a of this subsection within 60 days after the date of the financial statements.

c. Whenever the commission so requires, an interim financial report shall be filed as of the date and within the period specified in the commission's request.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 202, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC830011, eff. July 1, 1983; Case No. SEC840009, eff. October 5, 1984; Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 17, Issue 20, eff. July 1, 2001; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-40 Updates and amendments

A. A FINRA member broker-dealer shall update its Form BD as required by Form BD instructions and shall file all such amendments on and in compliance with all requirements of CRD and in full compliance with the regulations prescribed by the commission.

B. Any non-FINRA member broker-dealer shall update its Form BD as required by Form BD instructions and shall file all such amendments with the commission at its Division of Securities and Retail Franchising.

C. All broker-dealers must have at least one agent registered in Virginia as long as the firm maintains its registration.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 203, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 17, Issue 20, eff. July 1, 2001; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-50 Termination of registration

A. When a FINRA member broker-dealer desires to terminate its registration, it shall file Form BDW in compliance with all requirements of CRD and in full compliance with the regulations prescribed by the commission.

B. Any non-FINRA member broker-dealer shall file a Form BDW with the commission at its Division of Securities and Retail Franchising.

History

Statutory Authority: § 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 204, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC890040, eff. July 1, 1989; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-60 Broker-dealer merger or consolidation

A. When there is a merger or consolidation of two or more registrants, or the reorganization of a registrant, the surviving or new entity shall amend or file, as the case may be, Form BD (the filing of Form BD requires the payment of a $200 fee) and shall file a copy of the following with the commission at its Division of Securities and Retail Franchising upon its request:

The certificate of merger or consolidation.
The plan of merger or consolidation.
The amended or new charter and by-laws.
Any document of explanation.
The current financial statements of the surviving or new entity and surety bond, if necessary.

B. Such amendment and/or filing shall be made immediately after the merger or consolidation becomes effective, except that the required financial statements shall be filed within 30 calendar days of the effective date of the merger or consolidation. The registration of the surviving or new entity usually will be granted by the commission on the same date that the merger or consolidation becomes effective. Each agent of the nonsurviving or new entity shall comply with 21VAC5-20-90 before registration as an agent with his new employer becomes effective. Every other agent of the defunct corporation shall comply with 21VAC5-20-90 or 21VAC5-20-130, whichever may be applicable.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 205, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC890040, eff. July 1, 1989; Case No. SEC910057, eff. July 1, 1991; Virginia Register Volume 17, Issue 20, eff. July 1, 2001; Volume 25, Issue 22, eff. July 1, 2009.

21VAC5-20-65 Broker-dealer records retention requirements

The following requirements apply to every registered broker-dealer as a condition of registration as a broker-dealer under the Act:

All of the broker-dealer's records, promptly upon the request of the commission, will be made available for inspection by the commission and reproduction for the commission in an office where the records are maintained;
All of the broker-dealer's records or legible copies of the same, or printouts of the same, if automated, pertaining to a securities transaction any part of which occurred or is to occur within the Commonwealth of Virginia will be made available for inspection by the commission in the office of the commission's Division of Securities and Retail Franchising within five days after request of the commission for same;
The term "records" as used in this section means and includes all books, papers, documents, tapes, films, photographs, electronic readable format or other materials, regardless of physical form or characteristics that (i) are maintained for recordation or storage of information prepared, used or to be used in connection with a securities transaction or (ii) were used or are to be used in connection with securities transactions;
Failure to comply with this section may be considered grounds for the institution of a proceeding to revoke a broker-dealer's registration or for such other penalty prescribed by the Act; and
Any broker-dealer subject to a commission investigation may be required to pay the actual cost of the investigation.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Virginia Register Volume 23, Issue 23, eff. July 1, 2007.

21VAC5-20-70 Examinations/qualifications

A. Broker-dealers registered with the commission that are registered pursuant to § 15 of the Securities Exchange Act of 1934 (15 USC § 78o).

All principals of an applicant for registration as a broker-dealer must provide the commission with evidence of passing: (i) the Uniform Securities Agent State Law Examination, Series 63; (ii) the Uniform Combined State Law Examination, Series 66; or (iii) a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates within the two-year period immediately preceding the date of the application.
In lieu of meeting the examination requirement described in subdivision 1 of this subsection, at least two principals of an applicant may provide evidence of having passed the General Securities Principal Qualification Exam (Series 24) or at least two principals of an applicant may provide evidence of having passed the Qualification Examination for Principals appropriate to the category of registration as specified by the type of business conducted by the broker-dealer within the two-year period immediately preceding the date of the applications.

Any individual who has been registered in any state jurisdiction as a principal within the two-year period immediately preceding the date of the filing of an application shall not be required to comply with the examination requirements of this section.

For the purposes of this subsection, the term "principal" means any person associated with a broker-dealer who is engaged directly (i) in the management, direction or supervision on a regular or continuous basis on behalf of such broker-dealer of the following activities: sales, training, research, investment advice, underwriting, private placements, advertising, public relations, trading, maintenance of books or records, financial operations; or (ii) in the training of persons associated with such broker-dealer for the management, direction, or supervision on a regular or continuous basis of any such activities.

This subsection is applicable only to principals of broker-dealers that are, or intend to forthwith become, registered pursuant to § 15 of the federal Securities Exchange Act of 1934.

B. Broker-dealers registered with the commission that are not registered pursuant to § 15 of the federal Securities Exchange Act of 1934.

All principals of an applicant for registration as a broker-dealer must provide the commission with evidence of passing:

a. The Uniform Securities Agent State Law Examination, Series 63; the Uniform Combined State Law Examination, Series 66; or a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates within the two-year period immediately preceding the date of the application;

b. Any additional securities-related examination that the commission deems appropriate in light of the business in which the applicant proposes to engage; and

c. Any individual who has been registered in any state jurisdiction as a principal within the two-year period immediately preceding the date of the filing of an application shall not be required to comply with the examination requirements of this section.

This subsection is applicable only to principals of broker-dealers that are not, or do not intend to forthwith become, registered pursuant to § 15 of the federal Securities Exchange Act of 1934.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 206, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC820019, eff. July 1, 1983; Case No. SEC830011, eff. July 2, 1984; Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 11, Issue 21, eff. July 1, 1995; Volume 13, Issue 25, eff. September 1, 1997; Volume 14, Issue 22, eff. July 1, 1998; Volume 15, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 19, Issue 23, eff. July 1, 2003; Volume 25, Issue 22, eff. July 1, 2009.

21VAC5-20-80 Financial statements and reports

A. All financial statements required for registration of broker-dealers shall be prepared in accordance with generally accepted accounting principles, as promulgated by the American Institute of Certified Public Accountants.

B. Definitions:

"Certified financial statements" means those financial statements examined and reported upon with an opinion expressed by an independent accountant and shall include at least the following information:

Date of report, manual signature, city and state where issued, and identification without detailed enumeration of the financial statements and schedules covered by the report;
Representations as to whether the audit was made in accordance with generally accepted auditing standards and designation of any auditing procedures deemed necessary by the accountant under the circumstances of the particular case which may have been omitted, and the reason for their omission; nothing in this section however shall be construed to imply authority for the omission of any procedure which independent accountants would ordinarily employ in the course of an audit for the purpose of expressing the opinions required under this section;
Statement of the opinion of the accountant in respect to the financial statements and schedules covered by the report and the accounting principles and practices reflected therein, and as the consistency of the application of the accounting principles, or as to any changes in such principles which would have a material effect on the financial statements;
Any matters to which the accountant takes exception shall be clearly identified, the exemption thereto specifically and clearly stated, and, to the extent practicable, the effect of each such exception on the related financial statements given.

"Financial statements" means those reports, schedules and statements, prepared in accordance with generally accepted accounting principles and which contain at least the following information unless the context otherwise dictates:

Statement of Financial Condition or Balance Sheet;
Statement of Income;
Statement of Cash Flows;
Statement of Changes in Stockholder's/Partner's/Proprietor's/Member's Equity;
Statement of Changes in Liabilities Subordinated to Claims of General Creditors;
Schedule of the Computation of Net Capital Under Rule 15c3-1 of the Securities Exchange Act of 1934 (17 CFR 240.15c3-1);
Schedule of the Computation for Determination of the Reserve Requirements under Exhibit A of Rule 15c3-3 and Information Relating to the Possession and Control Requirements under Rule 15c3-3 of the Securities Exchange Act of 1934 (17 CFR 240.15c3-3).

"Independent accountant" means any certified public accountant in good standing and entitled to practice as such under the laws of the accountant's principal place of business or residence, and who is, in fact, not controlled by, or under common control with, the entity or person being audited.

For purposes of this definition, an accountant will be considered not independent with respect to any person or any of its parents, its subsidiaries, or other affiliates in which, during the period of the accountant's professional engagements to examine the financial statements being reported on the date of the report, the accountant or the firm or a member thereof had, or was committed to acquire, any direct financial interest or any material indirect financial interest; or in which, during the period of the accountant's professional engagements to examine the financial statements being reported on, at the date of the report or during the period covered by the financial statements, the accountant or the firm or a member thereof was connected as a promoter, underwriter, voting trustee, director, officer, or employee.
A firm will not be deemed not independent in regard to a particular person if a former officer or employee of such person is employed by the firm and such individual has completely disassociated himself from the person and its affiliates covering any period of employment by the person.
For partners in the firm participating in the audit or located in an office of the firm participating in a significant portion of the audit; and in determining whether an accountant may in fact be not independent with respect to a particular person, the commission will give appropriate consideration to all relevant circumstances, including evidence bearing on all relationships between the accountant and that person or any affiliate thereof, and will not confine itself to the relationships existing in connection with the filing of reports with the commission.

"Review of financial statements" means those financial statements reviewed by an independent accountant, and shall include at least the following:

Date of report, manual signature, city and state where issued, and identification without detailed enumeration of the financial statements and schedules covered by the report;
Representations that the review was performed in accordance with standards established by the American Institute of Certified Public Accountants;
Representations that the accountant is not aware of any material modification that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, other than those modifications, if any, indicated in the accountant's report.

"Unaudited financial statements" means those financial statements prepared in a format acceptable to the commission not accompanied by the statements and representations as set forth in the definitions of "certified financial statements" or "review of financial statements" of this subsection, and shall include an oath or affirmation that such statement or report is true and correct to the best knowledge, information, and belief of the person making such oath or affirmation. The oath or affirmation shall be made before a person authorized to administer the oath or affirmation, and shall be made by an officer of the entity for whom the financial statements were prepared.

C. Requirements for broker-dealers:

Every broker-dealer applicant subject to the Securities Exchange Act of 1934 shall file with the commission at its Division of Securities and Retail Franchising upon its request any financial information required to be provided to the SEC, or its designee, under the Securities Exchange Act of 1934.
All other broker-dealer applicants not subject to subdivision 1 of this subsection, unless exempted under subdivision 3 of this subsection, shall file financial statements as of a date within 90 days prior to the date of filing its application for registration. The statements need not be audited provided that the applicant shall also file audited financial statements as of the end of the most recent fiscal year end.
Those broker-dealer applicants in operation for a period of time less than 12 months, and for which audited financial statements have not been prepared or are not available, and are not registered with the SEC, a national securities association or a national securities exchange, shall be permitted to file financial statements reviewed by an independent accountant provided the following conditions are met:

a. The financial statements shall be as of a date within 30 days prior to the date of filing an application for registration; and

b. The financial statements shall be reviewed by an independent accountant as defined under subsection B of this section and in accordance with the definitions of "financial statements" and "review of financial statements" in subsection B and in accordance with subdivision 3 of this subsection.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 207, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. October, 5, 1984; Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 14, Issue 22, eff. July 1, 1998; Volume 17, Issue 20, eff. July 1, 2001; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-85 Limited Canadian broker-dealer registration

A. A broker-dealer that is resident in Canada and has no office or other physical presence in the Commonwealth of Virginia may, provided the broker-dealer is registered under this section, effect transactions in securities:

With or for a person from Canada who is temporarily residing in or visiting the Commonwealth with whom the Canadian broker-dealer had a bona fide business-client relationship before the person entered this Commonwealth; or
With or for a person present in this Commonwealth whose transactions are in a Canadian self-directed tax advantaged retirement account of which the person is the holder or contributor.

B. Application for registration as a broker-dealer under this section shall be filed with the commission at its Division of Securities and Retail Franchising or such other entity designated by the commission on and in full compliance with forms prescribed by the commission and shall include all information required by such forms.

C. An application for registration as a broker-dealer under this section shall be deemed incomplete for purposes of applying for registration unless the following executed forms, fee, and information are submitted to the commission:

An application in the form required by the jurisdiction in which the broker-dealer maintains its principal place of business.
Statutory fee payable to the Treasurer of Virginia in the amount of $200 United States currency pursuant to § 13.1-505 F of the Act.
Evidence that the applicant is registered as a broker-dealer in the jurisdiction from which it is effecting the transactions.
Evidence that the applicant is a member of a self-regulatory organization or stock exchange in Canada.
Any other information the commission may require.

D. A broker-dealer registered under this section shall:

Maintain its provincial or territorial registration and its membership in a self-regulatory organization or stock exchange in good standing;
Provide the commission upon request with its books and records relating to its business in the Commonwealth of Virginia as a broker-dealer;
Immediately notify the commission of any criminal action taken against it or of any finding or sanction imposed on the broker-dealer as a result of any self-regulatory or regulatory action involving fraud, theft, deceit, misrepresentation, or similar conduct;
Disclose to its clients in the Commonwealth of Virginia that the broker-dealer and its agents are not subject to the full regulatory requirements of the Act.

E. A broker-dealer's registration under this section, and any renewal thereof, shall expire annually at midnight on the 31st day of December unless renewed in accordance with subsection F of this section.

F. To renew its registration, a broker-dealer registered under this section shall file with the commission at its division the most recent renewal application, if any, filed in the jurisdiction in which the broker-dealer maintains its principle place of business, or if no such renewal application is required, the most recent application filed pursuant to subdivision C 1 of this section along with the statutory fee in the amount of $200 United States currency pursuant to § 13.1-505 F of the Act.

G. A Canadian broker-dealer registered under this section and acting in accordance with the limitations set out in this section is exempt from all other rules applicable to broker-dealers except the anti-fraud provisions of the Act and the requirements set out in this section.

History

Statutory Authority: §§ 12.1-13 and 13.1-523.1 of the Code of Virginia.
Historical Notes: Derived from Virginia Register Volume 17, Issue 20, eff. July 1, 2001; amended, Virginia Register Volume 19, Issue 23, eff. July 1, 2003; Volume 31, Issue 25, eff. July 31, 2015.

Part II Broker-Dealer Agents

21VAC5-20-90 Application for registration as a broker-dealer agent

A. Application for registration as an agent of a FINRA member shall be filed on and in compliance with all requirements of CRD and in full compliance with the forms and regulations prescribed by the commission. The application shall include all information required by such forms.

An application shall be deemed incomplete for registration as a broker-dealer agent unless the applicant submits the following executed forms, fee, and information:

Form U4.
The statutory fee made payable to FINRA in the amount of $40.
Evidence in the form of a FINRA exam report of passing within the two-year period immediately preceding the date of the application: (i) the Uniform Securities Agent State Law Examination, Series 63; (ii) the Uniform Combined State Law Examination, Series 66; or (iii) a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates.
Any other information the commission may require.

B. Application for registration for non-FINRA member broker-dealer agents shall be filed on and in compliance with all requirements and forms prescribed by the commission.

An application shall be deemed incomplete for registration as a broker-dealer agent unless the applicant submits the following executed forms, fee, and information:

Form U4.
The statutory fee in the amount of $40. The check must be made payable to the Treasurer of Virginia.
Evidence in the form of a FINRA exam report of passing within the two-year period immediately preceding the date of the application: (i) the Uniform Securities Agent State Law Examination, Series 63; (ii) the Uniform Combined State Law Examination, Series 66; or (iii) a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates.
Any other information the commission may require.

C. The commission shall either grant or deny each application for registration within 30 days after it is filed. However, if additional time is needed to obtain or verify information regarding the application, the commission may extend such period as much as 90 days by giving written notice to the applicant. No more than three such extensions may be made by the commission on any one application. An extension of the initial 30-day period, not to exceed 90 days, shall be granted upon written request of the applicant.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 208, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. July 2, 1984; Case No. SEC890040, eff. July 1, 1989; Case No. SEC900034, eff. July 1, 1990; Case No. SEC910057, eff. July 1, 1991; Virginia Register Volume 11, Issue 21, eff. July 1, 1995; Volume 13, Issue 25, eff. September 1, 1997; Volume 15, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 25, Issue 22, eff. July 1, 2009; Volume 29, Issue 20, eff. June 3, 2013; Volume 34, Issue 9, eff. December 1, 2017.

21VAC5-20-95 Employment of an agent by more than one broker-dealer

A. In accordance with § 13.1-504 B of the Act, an agent may be employed by more than one broker-dealer if all of the following conditions are satisfied:

Each employing broker-dealer is under common ownership and control as defined in subsection B of this section or as provided under 21VAC5-20-330 C 2 c.
Each employing broker-dealer is registered in accordance with 21VAC5-20-10.
Each employing broker-dealer agrees to be responsible for the employment activity of the agent.
The agent is registered in accordance with 21VAC5-20-90 by and on behalf of each employing broker-dealer.

B. The term "common ownership and control" as used in this section means the same individual possesses at least a 50% ownership interest in each employing broker-dealer.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Virginia Register Volume 23, Issue 23, eff. July 1, 2007; amended, Volume 29, Issue 20, eff. June 3, 2013; Volume 41, Issue 24, eff. August 1, 2025.

21VAC5-20-100 Expiration

The registration, and any renewals thereof, of a broker-dealer agent shall expire annually at midnight on the 31st day of December unless renewed in accordance with 21VAC5-20-110.

History

Statutory Authority: § 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 209, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC830011, eff. July 1, 1983; Case No. SEC840009, eff. October 5, 1984; Case No. SEC890040, eff. July 1, 1989.

21VAC5-20-110 Renewals

A. To renew the registration or registrations of its broker-dealer agent or agents, a FINRA member broker-dealer will be billed by CRD the statutory fee of $40 per broker-dealer agent. A renewal of registration or registrations shall be granted as a matter of course upon payment of the proper fee or fees unless the registration was, or the renewal would be, subject to revocation under § 13.1-506 of the Code of Virginia.

B. A non-FINRA member broker-dealer shall file with the commission at its Division of Securities and Retail Franchising the following items at least 30 days prior to the expiration of registration.

Agents to be Renewed (Form S.D.4.A) accompanied by the statutory fee of $40 for each agent whose registration is to be renewed. The check must be made payable to the Treasurer of Virginia.
If applicable, Agents to be Canceled with clear records (Form S.D.4.B).
If applicable, Agents to be Canceled without clear records (Form S.D.4.C).

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 210, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. October 5, 1984; Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 29, Issue 20, eff. June 3, 2013; Volume 34, Issue 9, eff. December 1, 2017.

21VAC5-20-120 Updates and amendments

A broker-dealer agent shall amend or update Form U4 as information becomes inaccurate. A Form U4 must be filed within 30 days of an amendment or update. All filings shall be made on CRD for agents of FINRA member firms or with the commission at its Division of Securities and Retail Franchising for all other broker-dealer agents.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 211, Case No. SEC890040, eff. July 1, 1989; amended, Virginia Register Volume 17, Issue 20, eff. July 1, 2001; Volume 29, Issue 20, eff. June 3, 2013; Volume 41, Issue 24, eff. August 1, 2025.

21VAC5-20-130 Termination of registration

A. When a broker-dealer agent terminates his registration with a broker-dealer, or a broker-dealer terminates an agent's registration, the broker-dealer shall file notice of such termination on Form U5 within 30 calendar days of the date of termination. All filings shall be made on CRD for agents of FINRA member firms or with the commission at its Division of Securities and Retail Franchising for all other broker-dealer agents.

B. If an agent learns that the broker-dealer has not filed the appropriate notice, the agent may file notice with the commission at its Division of Securities and Retail Franchising. The commission may terminate the agent's registration if the commission determines that a broker-dealer (i) is no longer in existence, (ii) has ceased conducting securities business, or (iii) cannot reasonably be located.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 212, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC890040, eff. July 1, 1989; Case No. SEC910057, eff. July 1, 1991; Virginia Register Volume 17, Issue 20, eff. July 1, 2001; Volume 25, Issue 22, eff. July 1, 2009; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-135 Continuing commission by retiring agents

The payment of compensation to a registered agent after he terminates his employment with a registered broker-dealer either by retirement, disability, death, or payment to his surviving spouse or other beneficiaries, will not be deemed to be a violation of commission regulations, provided the broker-dealer enters into a bona fide contract with either the retiring agent or the surviving spouse or beneficiaries, and the following conditions are met.

The retiring agent must have been continuously employed by or otherwise associated with the firm for a minimum of three years, as of the date of his retirement.
The sharing of commissions will be limited to commissions derived from accounts held for continuing customers of the retiring agent regardless of whether customer funds or securities are added to the accounts during the period after retirement.
The retiring agent must have demonstrated that he conducted himself in a manner exhibiting appropriate professional conduct. At a minimum, retirees must have been subject to no more than a low incidence of investment-related customer complaints and arbitrations settled or decided for more than $25,000 in the three years prior to the retirement date.
If the retiring agent has been subject to such complaints, the firm must have determined that the complaints did not require disciplinary action or heightened supervision, and that the retiree was not at fault for improper sales practices.
The retiring agent must not have been subject to a statutory disqualification during the three years prior to retirement.
The retiring agent must comply, to the extent applicable, with federal and state securities statutes and regulations, all policies, procedures, and rules of relevant regulatory and self-regulatory bodies, and must certify compliance with the policy at least annually.
The broker-dealer must establish parameters for a reasonable time period, not to exceed five years, following retirement and a percentage scale (that is either fixed or decreases the percentage the retiring agent receives each year) regarding the sharing of commissions by the retiring agent and the receiving registered agent.
The retiring agent must certify at least annually to the broker-dealer that he has adhered to the requirements and conditions of the agreement.
The broker-dealer must contact a representative sample of the account holders including a significant set of high grossing customer accounts subject to the agreement at least annually to confirm that the retiring agent has not provided investment advice or solicited trades in securities in any way. For example, the broker-dealer may contact annually: (i) holders of the top 10 highest grossing client accounts for that year and (ii) holders of one-half of the next 25% highest grossing client accounts.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Virginia Register Volume 25, Issue 22, eff. July 1, 2009.

21VAC5-20-140 Changing connection from one broker-dealer to another

A broker-dealer agent who changes connection from one broker-dealer to another shall comply with 21VAC5-20-90.

History

Statutory Authority: § 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 213, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. July 2, 1984; Case No. SEC890040, eff. July 1, 1989.

21VAC5-20-150 Examination/qualification

A. An individual applying for registration as a broker-dealer agent shall be required to show evidence of passing within the two-year period immediately preceding the date of the application: (i) the Uniform Securities Agent State Law Examination, Series 63; (ii) the Uniform Combined State Law Examination, Series 66; or (iii) a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates.

B. Any individual who meets the qualifications set forth in subsection A of this section and is registered in any state jurisdiction requiring registration within the two-year period immediately preceding the date of the filing of an application shall not be required to comply with the examination requirement set forth in subsection A of this section, except that the commission may require additional examinations for any individual found to have violated any federal or state securities laws.

C. Any registered agent or agent in the process of applying for registration renewal shall further demonstrate his business knowledge by complying with the applicable continuing education requirements set forth in any of the following:

Rule 1250 of the FINRA By Laws, as such provisions existed on October 17, 2011;
Rule 345 A of the NYSE Rules, as such provisions existed on July 1, 1995;
Rule G-3(h) of the Municipal Securities Rulemaking Board, as such provisions existed on July 1, 1995;
Rule 341 A of the NYSE Market Rules, as such provisions existed on May 14, 2012;
Rule 9.3A of the Chicago Board of Options Exchange, Inc., as such provisions existed on July 1, 1995; or
Article VI, Rule 11 of the Chicago Stock Exchange, Inc., as such provisions existed on July 1, 1995.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 214, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC820019, eff. August 15, 1982; Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 11, Issue 21, eff. July 1, 1995; Volume 13, Issue 25, eff. September 1, 1997; Volume 15, Issue 22, eff. July 1, 1999; Volume 25, Issue 22, eff. July 1, 2009; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-155 Limited Canadian broker-dealer agent registration

A. An agent of a Canadian broker-dealer who has no office or other physical presence in the Commonwealth of Virginia may, provided the broker-dealer agent is registered under this section, effect transactions in securities as permitted for a broker-dealer registered under 21VAC5-20-85.

B. Application for registration as a broker-dealer agent under this section shall be filed with the commission at its Division of Securities and Retail Franchising or such other entity designated by the commission on and in full compliance with forms prescribed by the commission and shall include all information required by such forms.

C. An application for registration as a broker-dealer agent under this section shall be deemed incomplete for purposes of applying for registration unless the following executed forms, fee, and information are submitted to the commission:

An application in the form required by the jurisdiction in which the broker-dealer maintains its principal place of business.
Statutory fee payable to the Treasurer of Virginia in the amount of $40 United States currency pursuant to § 13.1-505 G of the Act.
Evidence that the applicant is registered as a broker-dealer agent in the jurisdiction from which it is effecting the transactions.
Any other information the commission may require.

D. A broker-dealer agent registered under this section shall:

Maintain his provincial or territorial registration in good standing;
Immediately notify the commission of any criminal action taken against him or of any finding or sanction imposed on him as a result of any self-regulatory or regulatory action involving fraud, theft, deceit, misrepresentation or similar conduct.

E. A broker-dealer agent's registration under this section, and any renewal thereof, shall expire annually at midnight on the 31st day of December unless renewed in accordance with subsection F of this section.

F. To renew the registrations of its agents, a broker-dealer registered under this section shall file with the commission at its division the most recent renewal application, if any, filed in the jurisdiction in which the broker-dealer maintains its principal place of business, or if no such renewal application is required, the most recent application filed pursuant to subdivision C 1 of this section along with the statutory fee in the amount of $40 United States currency pursuant to § 13.1-505 G of the Act.

G. A Canadian broker-dealer agent registered under this section and acting in accordance with the limitations set out in this section is exempt from all other rules applicable to a broker-dealer agent except the anti-fraud provisions of the Act and the requirements set out in this section.

History

Statutory Authority: §§ 12.1-13 and 13.1-523.1 of the Code of Virginia.
Historical Notes: Derived from Virginia Register Volume 17, Issue 20, eff. July 1, 2001; amended, Virginia Register Volume 19, Issue 23, eff. July 1, 2003; Volume 31, Issue 25, eff. July 31, 2015; Volume 31, Issue 25, eff. July 31, 2015; Volume 34, Issue 9, eff. December 1, 2017.

Part III Agents of the Issuer

21VAC5-20-160 Application for registration as an agent of the issuer

A. Application for registration as an agent of the issuer shall be filed on and in compliance with all requirements and forms prescribed by the commission.

B. An application shall be deemed incomplete for registration as an agent of the issuer unless the following executed forms, fee, and information are submitted:

Form U4.
The statutory fee in the amount of $40. The check must be made payable to the Treasurer of Virginia.
Evidence in the form of a FINRA exam report of passing within the two-year period immediately preceding the date of the application: (i) the Uniform Securities Agent State Law Examination, Series 63; (ii) the Uniform Combined State Law Examination, Series 66; or (iii) a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates.
Any individual who meets the qualifications set forth in subdivision B 3 of this section and has been registered in any state jurisdiction requiring registration within the two-year period immediately preceding the date of the filing of an application shall not be required to comply with the examination requirement set forth in subdivision B 3 of this section, except that the Director of Securities and Retail Franchising may require additional examinations for any individual found to have violated any federal or state securities laws.
Any other information the commission may require.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 215, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. July 2, 1984; Case No. SEC890040, eff. July 1, 1989; Case No. SEC900034, eff. July 1, 1990; Virginia Register Volume 11, Issue 21, eff. July 1, 1995; Volume 13, Issue 25, eff. September 1, 1997; Volume 15, Issue 22, eff. July 1, 1999; Volume 25, Issue 22, eff. July 1, 2009; Volume 26, Issue 6, eff. November 15, 2009; Volume 29, Issue 20, eff. June 3, 2013; Volume 34, Issue 9, eff. December 1, 2017.

21VAC5-20-170 Expiration

The registration, and any renewals thereof, of an agent of the issuer shall expire annually at midnight on the 31st day of December unless renewed in accordance with 21VAC5-20-180.

History

Statutory Authority: § 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 216, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. July 2, 1984; Case No. SEC890040, eff. July 1, 1989.

21VAC5-20-180 Renewals

An issuer, on behalf of its agent or agents, shall file with the commission at its Division of Securities and Retail Franchising at least 30 days prior to the expiration of registration a registration renewal form (Form S.D.4) accompanied by the statutory fee of $40 for each agent whose registration is to be renewed. The check must be made payable to the Treasurer of Virginia.

History

Statutory Authority: § 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 217, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. July 2, 1984; Case No. SEC890040, eff. July 1, 1989; Volume 29, Issue 20, eff. June 3, 2013; Volume 34, Issue 9, eff. December 1, 2017.

21VAC5-20-190 Updates and amendments

An agent of the issuer shall amend or update Form U4 as information becomes inaccurate. A Form U4 must be filed within 30 days of an amendment or update. Filings shall be made with the commission at its Division of Securities and Retail Franchising.

History

Statutory Authority: § 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 218, Case No. SEC890040, eff. July 1, 1989; amended, Virginia Register Volume 29, Issue 20, eff. June 3, 2013; Volume 41, Issue 24, eff. August 1, 2025.

21VAC5-20-200 Termination of registration

When an agent of the issuer terminates his registration with an issuer, or an issuer terminates an agent's registration, the issuer shall file notice of such termination on Form U5 within 30 calendar days of the date of termination. Filings shall be made with the commission at its Division of Securities and Retail Franchising.

History

Statutory Authority: § 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 219, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC890040, eff. July 1, 1989; Case No. SEC910057, eff. July 1, 1991; Virginia Register Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-210 Changing connection from one issuer to another

An agent of the issuer who changes connection from one issuer to another shall comply with 21VAC5-20-160.

History

Statutory Authority: § 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 220, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. July 2, 1984; Case No. SEC890040, eff. July 1, 1989.

21VAC5-20-220 Examination/qualification; waiver of examination requirement

A. Except as described in subsection B of this section, an individual applying for registration as an agent of the issuer shall be required to provide evidence in the form of a FINRA exam report of passing (i) the Uniform Securities Agent State Law Examination, Series 63; (ii) the Uniform Combined State Law Examination, Series 66; or (iii) a similar examination in general use by securities administrators that, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates.

B. The commission may, in a registered offering not being made to the general public, in a Small Company Offering Registration, or in an offering exempt by commission order pursuant to § 13.1-514.1 B of the Act, waive the examination requirement for an officer or director of an issuer that is a corporation, or a general partner of an issuer of a limited partnership or a manager of an issuer that is a limited liability company who:

Will receive no commission or similar remuneration directly or indirectly in connection with the offer or sale of the issuer's securities; and
In the case of a small company offering registration, agrees to deliver to each prospective purchaser of a security to be issued by such issuer, at or before the time the offering document is required to be delivered, a copy of "A Consumer's Guide to Small Business Investments" prepared by NASAA (see CCH NASAA Reports 3676) and the application to register the agent is accompanied by an executed Affidavit Regarding Offers of Small Company Offering Registration (SCOR) Securities by Issuer Agents.

History

Statutory Authority: §§ 12.1-13 and 13.1-523.1 of the Code of Virginia.
Historical Notes: Derived from Rule 221, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC820019, eff. August 15, 1982; Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 11, Issue 21, eff. July 1, 1995; Volume 13, Issue 25, eff. September 1, 1997; Volume 15, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 19, Issue 23, eff. July 1, 2003; Volume 29, Issue 20, eff. June 3, 2013; Volume 41, Issue 24, eff. August 1, 2025.

21VAC5-20-225 Inspection of records

Every registered agent of the issuer as a condition of its registration as an agent under the Act hereby agrees and represents that:

All of the agent's records, immediately upon the request of the commission, will be made available for inspection by the commission and reproduction for the commission staff in the office where such records are maintained;
All of the agent's records (or legible copies, or printouts, if automated) pertaining to a securities transaction any part of which occurred or is to occur within the Commonwealth of Virginia will be made available for inspection by the commission in the office of the commission's Division of Securities and Retail Franchising within 48 hours after request of the commission;
The term "records" shall include all books, papers, documents, tapes, films, photographs, electronic readable format of other materials, regardless of physical form or characteristics, that are maintained for the recordation or storage of information prepared, used or to be used in connection with a securities transaction or that were used in connection with securities transactions;
Failure to comply with this section may be considered grounds for a proceeding to revoke an agent's registration or other penalty prescribed by the Act; and
Any issuer or agent subject to a commission investigation may be required to pay the actual cost of the investigation.

History

Statutory Authority: §§ 12.1-13 and 13.1-523.1 of the Code of Virginia.
Historical Notes: Derived from Virginia Register Volume 19, Issue 23, eff. July 1, 2003.

Part IV Broker-Dealer and Agent Regulations

21VAC5-20-230 Notice of civil, criminal, administrative or arbitrational action

A. An applicant or a registrant shall notify the commission:

Within 30 calendar days of the date any complaint, pleading or notice is served or received giving notice of any civil, criminal or administrative charge or any arbitration proceeding or any formal order of investigation, including any such charge, proceeding or order by a self-regulatory organization registered under the Securities Exchange Act of 1934, against the applicant or registrant which directly or indirectly relates to the registration or sale of securities to any activity as a broker-dealer or agent or to any activity in which a breach of trust is alleged.
Within 30 calendar days of the date filed, any answer, reply or response to the complaint, pleading or notice referred to in subdivision 1 of this subsection.
Within 30 calendar days of the date of any decision, order or sanction rendered, or any appeal filed with respect to such decision, order or sanction, in regard to the complaint, pleading or notice referred to in subdivision 1 of this subsection.

B. A registrant who is a FINRA member broker-dealer or is associated with a FINRA member broker-dealer may file the notification required by subsection A of this section either with the commission's Division of Securities and Retail Franchising or on and in compliance with all requirements of CRD.

C. One copy of any item referred to in subdivision 1, 2 or 3 of this subsection shall be filed with the commission promptly following a request for same.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 300, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC940048, Virginia Register Volume 10, Issue 24, eff. August 1, 1994; Virginia Register Volume 14, Issue 22, eff. July 1, 1998; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-240 Books and records of broker-dealers

Every broker-dealer registered or required to be registered under the Act shall make and keep true, accurate and current, and preserve the books and records relating to its business, as are described in SEC Rules 17a-3 (17 CFR 240.17a-3) and 17a-4 (17 CFR 240.17a-4), or Municipal Securities Rule Making Board (MSRB) Rules G7 and G8.

History

Statutory Authority: §§ 12.1-13 and 13.1-523.1 of the Code of Virginia.
Historical Notes: Derived from Rule 301, Case No. SEC810005, eff. July 1, 1981; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 17, Issue 20, eff. July 1, 2001; Volume 19, Issue 23, eff. July 1, 2003.

21VAC5-20-250 (Repealed.)

Historical Notes

Derived from Rule 302, Case No. SEC810005, eff. July 1, 1981; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997; repealed, Virginia Register Volume 19, Issue 23, eff. July 1, 2003.

21VAC5-20-260 Supervision of agents

A. A broker-dealer shall be responsible for the acts, practices, and conduct of its agents in connection with the sale of securities until such time as the agents have been properly terminated as provided by 21VAC5-20-130.

B. Every broker-dealer shall exercise diligent supervision over the securities activities of all of its agents.

C. Every agent employed by a broker-dealer shall be subject to the supervision of a principal designated by such broker-dealer. All principals designated by the broker-dealer shall exercise reasonable supervision over the securities activities of all of the agents under their responsibility.

D. As part of its responsibility under this section, every broker-dealer shall establish, maintain and enforce written procedures, a copy of which shall be kept in each business office, which shall (i) set forth the procedures adopted by the broker-dealer to comply with the Act and regulations, including but not limited to the following duties imposed by this section, and (ii) state at which business office or offices the broker-dealer keeps and maintains the records required by 21VAC5-20-240:

The review and written approval by the designated supervisor of the opening of each new customer account;
The frequent examination of all customer accounts to detect and prevent irregularities or abuses;
The prompt review and written approval by a designated supervisor of all securities transactions by agents and all correspondence pertaining to the solicitation or execution of all securities transactions by agents;
The review and written approval by the designated supervisor of the delegation by any customer of discretionary authority with respect to the customer's account to the broker-dealer or to a stated agent or agents of the broker-dealer and the prompt written approval of each discretionary order entered on behalf of that account; and
The prompt review and written approval of the handling of all customer complaints.

E. Every broker-dealer who has designated more than one principal pursuant to subsection C of this section shall designate a principal or group of principals, independent from those that conduct direct agent supervision who shall supervise and periodically review the activities of the principals designated pursuant to subsection C of this section.

All principals designated pursuant to subsections C and E shall exercise reasonable supervision over those individuals under their responsibility to ensure compliance with these subsections.

F. Every broker-dealer shall no less often than annually conduct a physical inspection of each business office of the broker-dealer to ensure (i) the agent or agents at the respective business office are in compliance with the statutory provisions of the Act or regulations promulgated by the commission and (ii) the written procedures and compliance requirements of the broker-dealer are enforced.

For purposes of this section, the term "principal" means, but is not limited to, an individual engaged directly in (i) the management, direction, or supervision on a regular or continuous basis on behalf of such broker-dealer of the following activities: sales, training, research, investment advice, underwriting, private placements, advertising, public relations, trading, maintenance of books or records, financial operations; or (ii) the training of persons associated with such broker-dealer for the management, direction, or supervision on a regular or continuous basis of any such activities.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 303, Case No. SEC810005, eff. July 1, 1981; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Errata, 13:26 VA.R. 3710 September 15, 1997; amended, Virginia Register Volume 19, Issue 23, eff. July 1, 2003; Volume 26, Issue 22, eff. July 1, 2010; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-270 (Repealed.)

Historical Notes

Derived from Rule 304, Case No. SEC810005, eff. July 1, 1981; repealed, Virginia Register Volume 19, Issue 23, eff. July 1, 2003.

21VAC5-20-280 Prohibited business conduct

A. Every broker-dealer is required to observe high standards of commercial honor and just and equitable principles of trade in the conduct of its business. The acts and practices described in this subsection are considered contrary to such standards and may constitute grounds for denial, suspension, or revocation of registration or such other action authorized by the Act. No broker-dealer who is registered or required to be registered shall:

Engage in a pattern of unreasonable and unjustifiable delays in the delivery of securities purchased by any of its customers or in the payment upon request of free credit balances reflecting completed transactions of any of its customers, or take any action that directly or indirectly interferes with a customer's ability to transfer his account; provided that the account is not subject to any lien for moneys owed by the customer or other bona fide claim, including seeking a judicial order or decree that would bar or restrict the submission, delivery or acceptance of a written request from a customer to transfer his account;
Induce trading in a customer's account which is excessive in size or frequency in view of the financial resources and character of the account;
Recommend to a customer the purchase, sale or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the customer. The reasonable basis to recommend any such transaction to a customer shall be based upon the risks associated with a particular security, and the information obtained through the diligence and inquiry of the broker-dealer to ascertain the customer's investment profile. A customer's investment profile includes the customer's investment objectives, financial situation, risk tolerance and needs, tax status, age, other investments, investment experience, investment time horizon, liquidity needs, and any other relevant information known by the broker-dealer or of which the broker-dealer is otherwise made aware in connection with such recommendation;
Execute a transaction on behalf of a customer without authority to do so or, when securities are held in a customer's account, fail to execute a sell transaction involving those securities as instructed by a customer, without reasonable cause;
Exercise any discretionary power in effecting a transaction for a customer's account without first obtaining written discretionary authority from the customer, unless the discretionary power relates solely to the time or price for the execution of orders;
Execute any transaction in a margin account without securing from the customer a properly executed written margin agreement promptly after the initial transaction in the account, or fail, prior to or at the opening of a margin account, to disclose to a noninstitutional customer the operation of a margin account and the risks associated with trading on margin at least as comprehensively as required by FINRA Rule 2264;
Fail to segregate customers' free securities or securities held in safekeeping;
Hypothecate 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 SEC;
Enter into a transaction with or for a customer at a price not reasonably related to the current market price of a security or receiving an unreasonable commission or profit;
Fail to furnish to a customer purchasing securities in an offering, no later than the date of confirmation of the transaction, either a final prospectus or a preliminary prospectus and an additional document, which together include all information set forth in the final prospectus, either by (i) hard copy prospectus delivery or (ii) electronic prospectus delivery;
Introduce customer transactions on a "fully disclosed" basis to another broker-dealer that is not exempt under § 13.1-514 B 6 of the Act;
a. Charge unreasonable and inequitable fees for services performed, including miscellaneous services such as collection of moneys due for principal, dividends or interest, exchange or transfer of securities, appraisals, safekeeping, or custody of securities and other services related to its securities business;

b. Charge a fee based on the activity, value or contents (or lack thereof) of a customer account unless written disclosure pertaining to the fee, which shall include information about the amount of the fee, how imposition of the fee can be avoided and any consequence of late payment or nonpayment of the fee, was provided no later than the date the account was established or, with respect to an existing account, at least 60 days prior to the effective date of the fee;

Offer to buy from or sell to any person any security at a stated price unless the broker-dealer is prepared to purchase or sell at the price and under such conditions as are stated at the time of the offer to buy or sell;
Represent that a security is being offered to a customer "at a market" or a price relevant to the market price unless the broker-dealer knows or has reasonable grounds to believe that a market for the security exists other than that made, created or controlled by the broker-dealer, or by any person for whom he is acting or with whom he is associated in the distribution, or any person controlled by, controlling or under common control with the broker-dealer;
Effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or fraudulent device, practice, plan, program, design or contrivance, which may include:

a. Effecting any transaction in a security which involves no change in the beneficial ownership thereof;

b. Entering an order for the purchase or sale of any security with the knowledge that an order of substantially the same size, at substantially the same time and substantially the same price, for the sale of any security, has been or will be entered by or for the same or different parties for the purpose of creating a false or misleading appearance of active trading in the security or a false or misleading appearance with respect to the market for the security; however, nothing in this subdivision shall prohibit a broker-dealer from entering bona fide agency cross transactions for its customers; or

c. Effecting, alone or with one or more other persons, a series of transactions in any security creating actual or apparent active trading in the security or raising or depressing the price of the security, for the purpose of inducing the purchase or sale of the security by others;

Guarantee a customer against loss in any securities account of the customer carried by the broker-dealer or in any securities transaction effected by the broker-dealer with or for the customer;
Publish or circulate, or cause to be published or circulated, any notice, circular, advertisement, newspaper article, investment service, or communication of any kind which purports to report any transaction as a purchase or sale of any security unless the broker-dealer believes that the transaction was a bona fide purchase or sale of the security; or which purports to quote the bid price or asked price for any security, unless the broker-dealer believes that the quotation represents a bona fide bid for, or offer of, the security;
Use any advertising or sales presentation in such a fashion as to be deceptive or misleading. An example of such practice would be a distribution of any nonfactual data, material or presentation based on conjecture, unfounded or unrealistic claims or assertions in any brochure, flyer, or display by words, pictures, graphs or otherwise designed to supplement, detract from, supersede or defeat the purpose or effect of any prospectus or disclosure;
Fail to make reasonably available upon request to any person expressing an interest in a solicited transaction in a security, not listed on a registered securities exchange or quoted on an automated quotation system operated by a national securities association approved by regulation of the commission, a balance sheet of the issuer as of a date within 18 months of the offer or sale of the issuer's securities and a profit and loss statement for either the fiscal year preceding that date or the most recent year of operations, the names of the issuer's proprietor, partners or officers, the nature of the enterprises of the issuer and any available information reasonably necessary for evaluating the desirability or lack of desirability of investing in the securities of an issuer. All transactions in securities described in this subdivision shall comply with the provisions of § 13.1-507 of the Act;
Fail to disclose that the broker-dealer is controlled by, controlling, affiliated with or under common control with the issuer of any security before entering into any contract with or for a customer for the purchase or sale of the security, the existence of control to the customer, and if disclosure is not made in writing, it shall be supplemented by the giving or sending of written disclosure at or before the completion of the transaction;
Fail to make a bona fide public offering of all of the securities allotted to a broker-dealer for distribution, whether acquired as an underwriter, a selling group member, or from a member participating in the distribution as an underwriter or selling group member;
Fail or refuse to furnish a customer, upon reasonable request, information to which the customer is entitled, or to respond to a formal written request or complaint;
Fail to clearly and separately disclose to its customer, prior to any security transaction, providing investment advice for compensation or any materially related transaction that the customer's funds or securities will be in the custody of an investment advisor or contracted custodian, in a manner that does not provide Securities Investor Protection Corporation protection, or equivalent third-party coverage over the customer's assets;
Market broker-dealer services that are associated with financial institutions in a manner that is misleading or confusing to customers as to the nature of securities products or risks;
In transactions subject to breakpoints, fail to:

a. Utilize advantageous breakpoints without reasonable basis for their exclusion;

b. Determine information that should be recorded on the books and records of a member or its clearing firm, which is necessary to determine the availability and appropriateness of breakpoint opportunities; or

c. Inquire whether the customer has positions or transactions away from the member that should be considered in connection with the pending transaction and apprise the customer of the breakpoint opportunities;

Use a certification or professional designation in connection with the offer, sale, or purchase of 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.

a. The use of such certification or professional designation includes the following:

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

(2) Use of a nonexistent or self-conferred certification or professional designation;

(3) 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; or

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

(a) Is primarily engaged in the business of instruction in sales or marketing;

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

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

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

b. There is a rebuttable presumption that a designating or certifying organization is not disqualified solely for purposes of subdivision 26 a (4) of this subsection, when the organization has been accredited by:

(1) The American National Standards Institute;

(2) The Institute for Credentialing Excellence (formerly the National Commission for Certifying Agencies); or

(3) An organization that is on the U.S. 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 or marketing.

c. 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:

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

(2) The manner in which those words are combined.

d. For purposes of this section, a 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:

(1) Indicates seniority within the organization; or

(2) Specifies an individual's area of specialization within the organization.

For purposes of this subdivision d, "financial services regulatory agency" includes an agency that regulates broker-dealers, investment advisers, or investment companies as defined under § 3 (a)(1) of the Investment Company Act of 1940 (15 USC § 80a-3(a)(1)).

e. Nothing in this regulation shall limit the commission's authority to enforce existing provisions of law;

Represent that securities will be listed or that application for listing will be made on a securities exchange or the National Association of Securities Dealers Automated Quotations (NASDAQ) system or other quotation system without reasonable basis in fact for the representation;
Falsify or alter so as to make false or misleading any record or document or any information provided to the commission;
Negotiate, facilitate, or otherwise execute a transaction on behalf of an investor involving securities issued by a third party pursuant to a claim for exemption under subsection B of § 13.1-514 of the Act unless the broker-dealer intends to report the securities owned and the value of such securities on at least a quarterly basis to the investor;
Offer or sell securities pursuant to a claim for exemption under subsection B of § 13.1-514 of the Act without having first verified the information relating to the securities offered or sold, which shall include ascertaining the risks associated with investing in the respective security;
Allow any person to represent or utilize its name as a trading platform without conspicuously disclosing the name of the registered broker-dealer in effecting or attempting to effect purchases and sales of securities; or
Engage in any conduct that constitutes a dishonest or unethical practice including forgery, embezzlement, nondisclosure, incomplete disclosure or material omissions or untrue statements of material facts, manipulative or deceptive practices, or fraudulent course of business.

B. Every agent is required to observe high standards of commercial honor and just and equitable principles of trade in the conduct of his business. The acts and practices described in this subsection are considered contrary to such standards and may constitute grounds for denial, suspension, or revocation of registration or such other action authorized by the Act. No agent who is registered or required to be registered shall:

Engage in the practice of lending or borrowing money or securities from a customer, or acting as a custodian for money, securities or an executed stock power of a customer;
Effect any securities transaction not recorded on the regular books or records of the broker-dealer which the agent represents, unless the transaction is authorized in writing by the broker-dealer prior to execution of the transaction;
Establish or maintain an account containing fictitious information in order to execute a transaction which would otherwise be unlawful or prohibited;
Share directly or indirectly in profits or losses in the account of any customer without the written authorization of the customer and the broker-dealer which the agent represents;
Divide or otherwise split the agent's commissions, profits or other compensation from the purchase or sale of securities in this Commonwealth with any person not also registered as an agent for the same broker-dealer, or for a broker-dealer under direct or indirect common control;
Engage in conduct specified in subdivision A 2, 3, 4, 5, 6, 10, 15, 16, 17, 18, 23, 24, 25, 26, 28, 30, 31, or 32 of this section;
Fail to comply with the continuing education requirements under 21VAC5-20-150 C; or
Hold oneself out as representing any person other than the broker-dealer with whom the agent is registered and, in the case of an agent whose normal place of business is not on the premises of the broker-dealer, failing to conspicuously disclose the name of the broker-dealer for whom the agent is registered when representing the dealer in effecting or attempting to effect the purchases or sales of securities.

C. No person shall publish, give publicity to, or circulate any notice, circular, advertisement, newspaper article, letter, investment service or communication which, though not purporting to offer a security for sale, describes the security, for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.

D. The purpose of this subsection is to identify practices in the securities business that are generally associated with schemes to manipulate and to identify prohibited business conduct of broker-dealers or sales agents who are registered or required to be registered.

Entering into a transaction with a customer in any security at an unreasonable price or at a price not reasonably related to the current market price of the security or receiving an unreasonable commission or profit.
Contradicting or negating the importance of any information contained in a prospectus or other offering materials with intent to deceive or mislead or using any advertising or sales presentation in a deceptive or misleading manner.
In connection with the offer, sale, or purchase of a security, falsely leading a customer to believe that the broker-dealer or agent is in possession of material, nonpublic information that would affect the value of the security.
In connection with the solicitation of a sale or purchase of a security, engaging in a pattern or practice of making contradictory recommendations to different investors of similar investment objective for some to sell and others to purchase the same security, at or about the same time, when not justified by the particular circumstances of each investor.
Failing to make a bona fide public offering of all the securities allotted to a broker-dealer for distribution by, among other things, (i) transferring securities to a customer, another broker-dealer, or a fictitious account with the understanding that those securities will be returned to the broker-dealer or its nominees or (ii) parking or withholding securities.
a. In addition to the application of the general anti-fraud provisions against anyone in connection with practices similar in nature to the practices discussed in this subdivision 6, subdivisions (1) through (6) of this subdivision 6 a specifically apply only in connection with the solicitation of a purchase or sale of over the counter (OTC) unlisted non-NASDAQ equity securities except those exempt from registration under 21VAC5-40-50:

(1) Failing to advise the customer, both at the time of solicitation and on the confirmation, of any and all compensation related to a specific securities transaction to be paid to the agent including commissions, sales charges, or concessions.

(2) In connection with a principal transaction, failing to disclose, both at the time of solicitation and on the confirmation, a short inventory position in the firm's account of more than 3.0% of the issued and outstanding shares of that class of securities of the issuer; however, this subdivision 6 of this subsection shall apply only if the firm is a market maker at the time of the solicitation.

(3) Conducting sales contests in a particular security.

(4) After a solicited purchase by a customer, failing or refusing, in connection with a principal transaction, to promptly execute sell orders.

(5) Soliciting a secondary market transaction when there has not been a bona fide distribution in the primary market.

(6) Engaging in a pattern of compensating an agent in different amounts for effecting sales and purchases in the same security.

b. Although subdivisions D 6 a (1) through (6) of this section do not apply to OTC unlisted non-NASDAQ equity securities exempt from registration under 21VAC5-40-50, nothing in this subsection precludes application of the general anti-fraud provisions against anyone in connection with practices similar in nature to the practices discussed in subdivisions D 6 a (1) through (6) of this section.

Effecting any transaction in, or inducing the purchase or sale of, any security by means of any manipulative, deceptive, or other fraudulent device or contrivance including the use of boiler room tactics or use of fictitious or nominee accounts.
Failing to comply with any prospectus delivery requirements promulgated under federal law or the Act.
In connection with the solicitation of a sale or purchase of an OTC unlisted non-NASDAQ security, failing to promptly provide the most current prospectus or the most recently filed periodic report filed under § 13 of the Securities Exchange Act when requested to do so by a customer.
Marking any order tickets or confirmations as unsolicited when in fact the transaction was solicited.
For any month in which activity has occurred in a customer's account, but in no event less than every three months, failing to provide each customer with a statement of account with respect to all OTC non-NASDAQ equity securities in the account, containing a value for each such security based on the closing market bid on a date certain; however, this subdivision shall apply only if the firm has been a market maker in the security at any time during the month in which the monthly or quarterly statement is issued.
Failing to comply with any applicable provision of the FINRA Rules or any applicable fair practice, privacy, or ethical standard promulgated by the SEC or by a self-regulatory organization approved by the SEC.
In connection with the solicitation of a purchase or sale of a designated security:

a. Failing to disclose to the customer the bid and ask price, at which the broker-dealer effects transactions with individual, retail customers, of the designated security as well as its spread in both percentage and dollar amounts at the time of solicitation and on the trade confirmation documents; or

b. Failing to include with the confirmation, the notice disclosure contained under 21VAC5-20-285, except the following shall be exempt from this requirement:

(1) Transactions in which the price of the designated security is $5.00 or more, exclusive of costs or charges; however, if the designated security is a unit composed of one or more securities, the unit price divided by the number of components of the unit other than warrants, options, rights, or similar securities must be $5.00 or more, and any component of the unit that is a warrant, option, right, or similar securities, or a convertible security must have an exercise price or conversion price of $5.00 or more.

(2) Transactions that are not recommended by the broker-dealer or agent.

(3) Transactions by a broker-dealer (i) whose commissions, commission equivalents, and mark-ups from transactions in designated securities during each of the preceding three months, and during 11 or more of the preceding 12 months, did not exceed 5.0% of its total commissions, commission-equivalents, and mark-ups from transactions in securities during those months; and (ii) who has not executed principal transactions in connection with the solicitation to purchase the designated security that is the subject of the transaction in the preceding 12 months.

(4) Any transaction that, upon prior written request or upon its own motion, the commission conditionally or unconditionally exempts as not encompassed within the purposes of this section.

c. For purposes of this section, the term "designated security" means any equity security other than a security:

(1) Registered, or approved for registration upon notice of issuance, on a national securities exchange and makes transaction reports available pursuant to 17 CFR 11Aa3-1 under the Securities Exchange Act of 1934;

(2) Authorized, or approved for authorization upon notice of issuance, for quotation in the NASDAQ system;

(3) Issued by an investment company registered under the Investment Company Act of 1940;

(4) That is a put option or call option issued by The Options Clearing Corporation; or

(5) Whose issuer has net tangible assets in excess of $4 million as demonstrated by financial statements dated within no less than 15 months that the broker-dealer has reviewed and has a reasonable basis to believe are true and complete in relation to the date of the transaction with the person, and

(a) In the event the issuer is other than a foreign private issuer, are the most recent financial statements for the issuer that have been audited and reported on by an independent public accountant in accordance with the provisions of 17 CFR 210.2-02 under the Securities Exchange Act of 1934; or

(b) In the event the issuer is a foreign private issuer, are the most recent financial statements for the issuer that have been filed with the SEC; furnished to the SEC pursuant to 17 CFR 240.12g3-2(b) under the Securities Exchange Act of 1934; or prepared in accordance with generally accepted accounting principles in the country of incorporation, audited in compliance with the requirements of that jurisdiction, and reported on by an accountant duly registered and in good standing in accordance with the regulations of that jurisdiction.

E. A broker-dealer or an agent may delay or refuse a transaction or a disbursement of funds that may involve or result in the financial exploitation of an individual pursuant to § 63.2-1606 L of the Code of Virginia.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 305, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC830011, eff. July 1, 1983; Case No. SEC900034, eff. July 1, 1990; amended to renumber by Case No. SEC910057, eff. July 1, 1991; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 15, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 19, Issue 23, eff. July 1, 2003; Volume 23, Issue 23, eff. July 1, 2007; Volume 24, Issue 21, eff. July 1, 2008; Volume 26, Issue 22, eff. July 1, 2010; Volume 29, Issue 20, eff. June 3, 2013; Volume 31, Issue 8, eff. December 1, 2014; Volume 31, Issue 25, eff. July 31, 2015; Volume 31, Issue 25, eff. July 31, 2015; Volume 33, Issue 12, eff. February 1, 2017; Volume 36, Issue 2, eff. September 16, 2019.

21VAC5-20-285 Customer notice for designated securities

A. Broker-dealers that solicit the purchase and sale of designated securities shall provide the following notice to customers:

IMPORTANT CUSTOMER NOTICE-READ CAREFULLY

You have just entered into a solicited transaction involving a security which may not trade on an active national market. The following should help you understand this transaction and be better able to follow and protect your investment.

Q. What is meant by the BID and ASK price and the spread?

A. The BID is the price at which you could sell your securities at this time. The ASK is the price at which you bought. Both are noted on your confirmation. The difference between these prices is the "spread," which is also noted on the confirmation, in both a dollar amount and a percentage relative to the ASK price.

Q. How can I follow the price of my security?

A. For the most part, you are dependent on broker-dealers that trade in your security for all price information. You may be able to find a quote in the newspaper, but you should keep in mind that the quote you see will be for dealer-to-dealer transactions (essentially wholesale prices and will not necessarily be the prices at which you could buy or sell).

Q. How does the spread relate to my investments?

A. The spread represents the profit made by your broker-dealer and is the amount by which your investment must increase (the BID must rise) for you to break even. Generally, a greater spread indicates a higher risk.

Q. How do I compute the spread?

A. If you bought 100 shares at an ASK price of $1.00, you would pay $100 (100 shares X $1.00 = $100). If the BID price at the time you purchased your stock was $.50, you could sell the stock back to the broker-dealer for $50 (100 shares X $.50 = $50). In this example, if you sold at the BID price, you would suffer a loss of 50%.

Q. Can I sell at any time?

A. Maybe. Some securities are not easy to sell because there are few buyers, or because there are no broker-dealers who buy or sell them on a regular basis.

Q. Why did I receive this notice?

A. The laws of some states require your broker-dealer or sales agent to disclose the BID and ASK price on your confirmation and include this notice in some instances. If the BID and ASK were not explained to you at the time you discussed this investment with your broker, you may have further rights and remedies under both state and federal law.

Q. Where do I go if I have a problem?

A. If you cannot work the problem out with your broker-dealer, you may contact the Virginia State Corporation Commission or the securities commissioner in the state in which you reside, the United States Securities and Exchange Commission, or FINRA.

B. For the purpose of this section, the term "designated security" shall be defined under 21VAC5-20-280 D 13 c.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Virginia Register Volume 29, Issue 20, eff. June 3, 2013; amended, Virginia Register Volume 31, Issue 8, eff. December 1, 2014.

21VAC5-20-290 Financial responsibility

A. The term "financial responsibility," as used in § 13.1-505 A of the Act, shall mean that the net capital of an applicant or registrant subject to the Securities Exchange Act of 1934 shall be demonstrated and maintained at a level required by subsection B of this section.

B. For the purpose of demonstrating "financial responsibility," all broker-dealers subject to the Securities Exchange Act of 1934 shall meet and maintain the net capital and ratio requirements as prescribed by Rule 15c3-1 under the Securities Exchange Act of 1934 (17 CFR 240.15c3-1). The net capital and ratio requirements shall be computed in accordance with Rule 15c3-1 under the Securities Exchange Act of 1934 (17 CFR 240.15c3-1).

C. Every broker-dealer subject to the Securities Exchange Act of 1934 shall notify the commission at its Division of Securities and Retail Franchising in writing within three business days should its net capital drop below its net capital requirement and shall immediately take action necessary to establish a net capital in compliance with Rule 15c3-1 of the Securities Exchange Act of 1934.

D. Every broker-dealer not subject to the Securities Exchange Act of 1934 shall file with the commission certified financial statements as defined in subsection B of 21VAC5-20-80 within 60 days of its fiscal year end.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 306, Case No. SEC810005, eff. July 1, 1981; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 14, Issue 22, eff. July 1, 1998; Volume 17, Issue 20, eff. July 1, 2001.

21VAC5-20-300 Net worth

A. For broker-dealers not subject to the Securities Exchange Act of 1934, the term "net worth" as used in § 13.1-505 B of the Act shall be computed as total assets minus total liabilities, excluding liabilities of the broker-dealer which are subordinated to the claims of creditors pursuant to a satisfactory subordination agreement as defined in Appendix D of Rule 15c3-1 under the Securities Exchange Act of 1934 (17 CFR 240.15c3-1d).

B. If a broker-dealer applicant or registrant not subject to the Securities Exchange Act of 1934 cannot demonstrate and maintain a net worth in excess of $25,000, the commission shall require the filing of a surety bond on the form prescribed. The amount of the penal sum of the surety bond can be determined according to the following table:

NET WORTH (Rounded to nearest $1)	PENALTY AMOUNT OF SURETY BOND
Less than $5,000	$25,000
5,001-10,000	20,000
10,001-15,000	15,000
15,001-20,000	10,000
20,001-25,000	5,000

C. If the net worth of a broker-dealer registrant not subject to the Securities Exchange Act of 1934 plus the penal sum of its surety bond drops below $25,000, the registrant must so notify the Division of Securities and Retail Franchising in writing within three business days and immediately take action to establish a net worth in excess of $25,000.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 307, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 14, Issue 22, eff. July 1, 1998; Volume 15, Issue 22, eff. July 1, 1999.

21VAC5-20-310 Reserve requirements and custody of customer funds and securities

All broker-dealer applicants and registrants subject to the net capital provisions of 21VAC5-20-290 B shall be required to prepare and maintain such records and accounts as specified in, and to comply in all other respects with, the provisions of Rule 15c3-3 under the Securities Exchange Act of 1934 (17 CFR 240.15c3-3).

History

Statutory Authority: § 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 308, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC890040, eff. July 1, 1989.

21VAC5-20-320 Clerical or ministerial services

The phrase "clerical or ministerial services", as used in §§ 13.1-504.1 and 13.1-504.2 of the Act, shall mean any or all of the following:

Distributing to customers of the savings and loan association, savings bank or credit union literature that describes the services available from the registered broker-dealer.
Providing to customers of the savings and loan association, savings bank or credit union the broker-dealer's account applications and assisting customers in completing such applications.
Assisting customers of the savings and loan association, savings bank or credit union in contacting the registered broker-dealer.
Assisting customers of the savings and loan association, savings bank or credit union in effecting the transfer of funds into or out of the customers' accounts maintained at such association, bank or credit union.
Assisting customers of the savings and loan association, savings bank or credit union in transmitting securities and related documents to the registered broker-dealer, and providing the materials necessary for such transmittal.

History

Statutory Authority: § 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 309, Case No. SEC840009, eff. July 2, 1984; amended by Case No. SEC890040, eff. July 1, 1989.

21VAC5-20-330 Model rules for sales of securities at financial institutions

A. This section applies exclusively to broker-dealer services conducted by broker-dealers and their agents on the premises of a financial institution where retail deposits are taken or through an affiliate of the financial institution.

This section does not alter or abrogate a broker-dealer's obligation to comply with other applicable laws, rules, or regulations that may govern the operations of broker-dealers and their agents, including but not limited to, supervisory obligations. Broker-dealers are responsible for the acts, practices, and conduct of their agents in connection with the offer and sale of securities. Additionally, this section does not apply to broker-dealer services provided to nonretail customers.

B. For purposes of this section, the following terms have the meanings indicated:

"Affiliate" means (i) an entity that a financial institution owns, in whole or in part or (ii) an entity that is a subsidiary of the financial institution's parent company.

"Broker-dealer services" means the investment banking or securities business as defined in paragraph (u) of Article I of the FINRA By-Laws, amended by SR-FINRA-2008-0026, effective December 15, 2008.

"Financial institution" means federal and state-chartered banks, savings and loan associations, savings banks, credit unions, and the service corporations of such institutions located in Virginia.

"Networking arrangement" means a contractual or other arrangement between a broker-dealer and a financial institution by which the broker-dealer conducts broker-dealer services on the premises of the financial institution where retail deposits are taken or through an affiliate of the financial institution.

C. Standards for broker-dealer conduct. No broker-dealer shall conduct broker-dealer services pursuant to a networking arrangement unless the broker-dealer and its agents comply with the following requirements:

Setting. Wherever practical, broker-dealer services shall be conducted in a physical location distinct from the area in which the financial institution's retail deposits are taken. In those situations where there is insufficient space to allow separate areas, the broker-dealer has a heightened responsibility to distinguish its services from those of the financial institution. In all situations, the broker-dealer shall identify its services in a manner that clearly distinguishes those services from the financial institution's retail deposit-taking activities. The broker-dealer's name shall be clearly displayed in the area in which the broker-dealer conducts its services.
a. Networking arrangements. There shall be a written agreement between the financial institution and its associated broker-dealer that shall, at a minimum, address the areas listed below. The written agreement shall be filed with the commission at its Division of Securities and Retail Franchising at least 90 days prior to its effective date.

(1) A description of the responsibilities of each party, including the features of the sales program and the roles of registered and unregistered personnel;

(2) A description of the responsibilities of broker-dealer personnel authorized to make investment sales or recommendations;

(3) A description of how referrals to associated broker-dealer personnel will be made;

(4) A description of compensation arrangements for unregistered personnel;

(5) A description of training to be provided to both registered and unregistered personnel;

(6) A description of broker-dealer office audits to be conducted by the broker-dealer, including frequency, reports associated with financial institutions and records to be reviewed;

(7) Authority of the financial institution and regulators to have access to relevant records of the broker-dealer and the financial institution in order to evaluate compliance with the agreement; and

(8) A statement identifying whether the broker-dealer will offer or sell securities issued pursuant to an exemption from registration under 21VAC5-45-20 (Regulation D, Rule 506, 15 USC § 77r(b)(4)(D), 17 CFR 230.506).

b. Program management. The program's management of the broker-dealer's networking arrangements shall address and include at a minimum, those items listed below.

(1) A description of relevant referral activities and compensation arrangements;

(2) A description of appropriate training requirements for various classes of personnel;

(3) The scope and frequency of compliance reviews and the manner and frequency of reporting to broker-dealer compliance supervisors and the financial institution compliance management group;

(4) The process of verifying that security purchases and sales are being conducted in accordance with the written networking agreement;

(5) The permissible use of financial institution and broker-dealer customer information, including how compliance with Virginia and federal law and with the broker-dealer's privacy policies will be achieved;

(6) The existence of any potential conflicts of interest between the broker-dealer activities and the financial institution and its affiliates and appropriate disclosure of the conflicts that result from the relationship; and

(7) A description of the method in which the broker-dealer will determine the suitability of the securities for its customers and a description of the supervisory procedures imposed for the offer and sale of securities issued pursuant to an exemption from registration under 21VAC5-45-20 (Regulation D, Rule 506, 15 USC § 77r(b)(4)(D), 17 CFR 230.506).

c. If a financial institution has a networking arrangement with a registered broker-dealer, an affiliate of the financial institution may also be registered as a broker-dealer and may also employ agents that are registered with the broker-dealer with which there is a networking arrangement. If the financial institution's affiliate is a registered broker-dealer, and both the affiliate and the broker-dealer operating under a networking arrangement employs dual agents, both the broker-dealer and the affiliate are equally responsible for the supervision of the agents. The agents must be registered for both the broker-dealer and the affiliate.

Customer disclosure and written acknowledgment.

a. At or prior to the time that a customer's securities brokerage account is opened by a broker-dealer on the premises of a financial institution where retail deposits are taken, the broker-dealer or its agents shall:

(1) Disclose, orally and in writing, that the securities products purchased or sold in a transaction with the broker-dealer:

(a) Are not insured by the Federal Deposit Insurance Corporation ("FDIC") or the National Credit Union Administration ("NCUA");

(b) Are not deposits or other obligations of the financial institution and are not guaranteed by the financial institution; and

(2) Make reasonable efforts to obtain from each customer during the account opening process a written acknowledgment of the disclosures required by subdivision C 3 a (1).

(3) Provide written disclosures that are conspicuous, easy to comprehend and presented in a clear and concise manner.

(4) Disclose, orally and in writing, that the broker-dealer and the financial institution are separate entities, and when mutual funds or other securities are bought through the broker-dealer, the client is doing business with the broker-dealer and not with the financial institution.

(5) Disclose, orally and in writing that the broker-dealer and the financial institution will likely receive compensation as a result of the purchase of securities or advisory services by the client through the broker-dealer.

b. If broker-dealer services include any written or oral representations concerning insurance coverage, other than FDIC insurance coverage, then clear and accurate written or oral explanations of the coverage must also be provided to the customers when such representations are first made.

Communications with the public.

a. All of the broker-dealer's confirmations and account statements must indicate clearly that the broker-dealer services are provided by the broker-dealer. Such indication may include the name of the financial institution or any of the financial institution's affiliates, but the name of the broker-dealer shall be in print larger than the name of the financial institution.

b. Advertisements and sales literature that announce the location of a financial institution where broker-dealer services are provided by the broker-dealer or its agents, or that are distributed by the broker-dealer or its agents on the premises of a financial institution, must disclose that securities products: are not insured by the FDIC; are not deposits or other obligations of the financial institution and are not guaranteed by the financial institution; and are subject to investment risks, including possible loss of the principal invested. The shorter logo format described in subdivision C 4 d may be used to provide these disclosures.

c. Recommendations by a broker-dealer or its agents concerning nondeposit investment products with a name similar to that of a financial institution must only occur pursuant to policies and procedures reasonably designed to minimize risk of customer confusion.

d. The following shorter logo format disclosures may be used by a broker-dealer or its agents in advertisements and sales literature, including material published, or designed for use, in radio or television broadcasts, automated teller machine ("ATM") screens, billboards, signs, posters and brochures, to comply with the requirements of subdivision C 4 b provided that such disclosures are displayed in a conspicuous manner:

(1) Not FDIC insured;

(2) No bank guarantee;

(3) May lose value.

e. As long as the omission of the disclosures required by subdivision C 4 b would not cause the advertisement or sales literature to be misleading in light of the context in which the material is presented, the disclosures are not required with respect to messages contained in:

(1) Radio broadcasts of 30 seconds or less;

(2) Electronic signs, including billboard-type signs that are electronic, time and temperature signs and ticker tape signs, but excluding messages contained in such media as television, on‑line computer services, or ATMs; and

(3) Signs, such as banners and posters, when used only as location indicators.

Notification of termination. The broker-dealer must promptly notify the financial institution if any agent of the broker-dealer who is employed by the financial institution is terminated for cause by the broker-dealer.
Referral fees paid to unregistered financial institution employees. Unregistered financial institution employees may only receive a one-time nominal fee of a fixed dollar amount for each customer referral, and only if the payment is not contingent on whether the referral results in an investment activity or a transaction.
Prohibited conduct.

In addition to the provisions of subsections A and B of 21VAC5-20-280, unless otherwise specified herein, broker-dealers and broker-dealer agents offering broker-dealer services in association with a financial institution or an affiliate of the financial institution, pursuant to a networking arrangement, shall not:

(1) Accept or receive compensation directly or indirectly from the financial institution for broker-dealer services provided;

(2) Identify themselves as being affiliated with the financial institution or any of the financial institution's affiliated companies;

(3) Fail to follow the terms of a networking agreement between a financial institution or any affiliated company of the financial institution concerning the offer and sale of securities; and

(4) Use nonregistered employees of the financial institution or any affiliate of the financial institution to solicit investors.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Virginia Register Volume 15, Issue 22, eff. July 1, 1999; amended, Virginia Register Volume 23, Issue 23, eff. July 1, 2007; Volume 29, Issue 20, eff. June 3, 2013.

Chapter 80 Investment Advisors

Part I Investment Advisor Registration, Notice Filing for Federal Covered Advisors, Expiration, Renewal, Updates and Amendments, Terminations and Merger or Consolidation

21VAC5-80-10 Application for registration as an investment advisor and notice filing as a federal covered advisor

A. Application for registration as an investment advisor shall be filed in compliance with all requirements of IARD and in full compliance with forms and regulations prescribed by the commission and shall include all information required by such forms.

B. An application shall be deemed incomplete for registration as an investment advisor unless the applicant submits the following executed forms, fee, and information:

Form ADV Parts 1 and 2 submitted to IARD.
The statutory fee made payable to FINRA in the amount of $200 submitted to IARD pursuant to § 13.1-505 F of the Act.
A copy of the client agreement.
A copy of the firm's supervisory and procedures manual as required by 21VAC5-80-170.
Copies of all advertising materials.
Copies of all stationery and business cards.
A signed affidavit stating that an investment advisor domiciled in Virginia has not conducted investment advisory business prior to registration, and for investment advisors domiciled outside of Virginia an affidavit stating that the advisor has fewer than six clients in the prior 12-month period.
An audited or certified balance sheet prepared in accordance with generally accepted accounting practices reflecting the financial condition of the investment advisor not more than 90 days prior to the date of such filing.
A copy of the firm's disaster recovery plan as required by 21VAC5-80-160 F.
Evidence of at least one qualified individual with an investment advisor representative registration pending on IARD on behalf of the investment advisor.
A copy of the firm's physical security and cybersecurity policies and procedures as required by 21VAC5-80-260 A.
A copy of the firm's privacy policy as required by 21VAC5-80-260 B.
Any other information the commission may require.

For purposes of this section, the term "net worth" means an excess of assets over liabilities, as determined by generally accepted accounting principles. Net worth shall not include: prepaid expenses (except as to items properly classified as assets under generally accepted accounting principles), deferred charges such as deferred income tax charges, goodwill, franchise rights, organizational expenses, patents, copyrights, marketing rights, unamortized debt discount and expense, all other assets of intangible nature, home furnishings, automobiles, and any other personal items not readily marketable in the case of an individual; advances or loans to stockholders and officers in the case of a corporation; and advances or loans to partners in the case of a partnership.

D. Every person who transacts business in this Commonwealth as a federal covered advisor shall file a notice as prescribed in subsection E of this section in compliance with all requirements of the IARD.

E. A notice filing for a federal covered advisor shall be deemed incomplete unless the federal covered advisor submits the following executed forms, fee, and information:

Form ADV Parts 1 and 2.
A fee made payable to FINRA in the amount of $200.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 1000, Case No. SEC870040, eff. July 2, 1987; amended by Case No. SEC900034, eff. July 1, 1990; Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 14, Issue 22, eff. July 1, 1998; Volume 17, Issue 20, eff. July 1, 2001; Volume 24, Issue 21, eff. July 1, 2008; Volume 25, Issue 22, eff. July 1, 2009; Volume 26, Issue 22, eff. July 1, 2010; Volume 29, Issue 20, eff. June 3, 2013; amended, Virginia Register Volume 36, Issue 2, eff. September 16, 2019.

21VAC5-80-20 Expiration

An investment advisor's registration or federal covered advisor's notice filing shall expire annually at midnight on the 31st day of December, unless renewed in accordance with 21VAC5-80-30.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 1001, Case No. SEC870040, eff. July 2, 1987; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997.

21VAC5-80-30 Renewals

A. To renew its registration, an investment advisor will be billed by IARD the statutory fee of $200 prior to the annual expiration date. A renewal of registration shall be granted as of course upon payment of the proper fee together with any surety bond that the commission may require pursuant to 21VAC5-80-180 B unless the registration was, or the renewal would be, subject to revocation under § 13.1-506 of the Act.

B. To renew its notice filing, a federal covered advisor will be billed by IARD the fee of $200 prior to the annual expiration date. A renewal of notice filing shall be granted as a matter of course upon payment of the proper fee.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 1002, Case No. SEC870040, eff. July 2, 1987; amended by Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 15, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-80-40 Updates and amendments

A. An investment advisor or federal covered advisor shall file electronically on IARD, in accordance with Form ADV instructions, any amendments to the investment advisor's Form ADV.

An amendment will be considered to be filed promptly if filed within 30 days of the event that requires the filing of the amendment; and
Within 90 days of the end of the investment advisor's fiscal year, an investment advisor must file electronically on IARD an Annual Updating Amendment to the Form ADV.
An investment advisor is prohibited from using an amendment until it receives notice of acceptance from the commission through IARD.

B. An investment advisor shall file the balance sheet as prescribed by Part 2A, Item 18 of Form ADV, unless excluded from such requirement, with the commission at its Division of Securities and Retail Franchising within 90 days of the investment advisor's fiscal year end. Any investment advisor who is registered in the state in which it maintains its principal place of business shall file with the commission at its Division of Securities and Retail Franchising any financial documents required to be filed by the state within 10 days of the time it must file these documents in such state.

C. A federal covered advisor shall maintain all other-than-Annual Amendments to Part 2 of Form ADV at its principal place of business and shall make a copy available to the commission at its Division of Securities and Retail Franchising within five days of its request.

History

Statutory Authority: §§ 12.1-13 and 13.1-523.1 of the Code of Virginia.
Historical Notes: Derived from Rule 1003, Case No. SEC870040, eff. July 2, 1987; amended by Case No. SEC890040, eff. July 1, 1989; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 14, Issue 22, eff. July 1, 1998; Volume 17, Issue 20, eff. July 1, 2001; Volume 19, Issue 23, eff. July 1, 2003; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-80-50 Termination of registration and notice filings

When an investment advisor or federal covered advisor desires to terminate its registration or notice filing, it shall file Form ADV-W on IARD. Notice of termination by a federal covered advisor shall be effective upon receipt by the commission or at a later date specified in the notice.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 1004, Case No. SEC870040, eff. July 2, 1987; amended by Case No. SEC890040, eff. July 1, 1989; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 17, Issue 20, eff. July 1, 2001; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-80-60 Investment advisor merger or consolidation

In any merger, consolidation, or reorganization of an investment advisor or federal covered advisor, the surviving or new entity shall amend or file, as the case may be, a new application for registration or notice filing together with the proper fee on IARD.

For each investment advisor representative of the new or surviving entity who will transact business in this Commonwealth, an application for registration together with the proper fee or fees must also be filed on IARD in full compliance with the forms prescribed by the commission. The foregoing filing requirement applies to each investment advisor representative who has a place of business located in the Commonwealth and who is connected with a federal covered advisor that is the new or surviving entity to the merger or consolidation.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 1005, Case No. SEC870040, eff. July 2, 1987; amended by Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 15, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-80-65 Investment advisor records retention requirements

The following requirements apply to every registered investment advisor as a condition of registration as an investment advisor under the Act:

All of the investment advisor's records, immediately upon the request of the commission, will be made available for inspection by the commission and reproduction for the commission in an office where the records are maintained;
All of the investment advisor's records or legible copies of the same, or printouts of the same, pertaining to a securities transaction, any part of which occurred or is to occur within the Commonwealth of Virginia, will be made available for inspection of the commission in the office of the commission's Division of Securities and Retail Franchising within five days after request of the commission for same;
The term "records" as used in this section means and includes all books, papers, documents, tapes, films, photographs, electronic readable format or other materials, regardless of physical form or characteristics that (i) are maintained for recordation or storage of information prepared, used or to be used in connection with a securities transaction or (ii) were used or are to be used in connection with securities transactions;
Failure to comply with this section may be considered grounds for the institution of a proceeding to revoke an investment advisor's registration or for such other penalty prescribed by the Act; and
Any investment advisor subject to a commission investigation may be required to pay the actual cost of the investigation.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Virginia Register Volume 23, Issue 23, eff. July 1, 2007.

Part II Investment Advisor Representative Registration, Expiration, Updates and Amendments, Termination, and Changing Connection from One Investment Advisor to Another

21VAC5-80-70 Application for registration as an investment advisor representative

A. Application for registration as an investment advisor representative shall be filed in compliance with all requirements of CRD and in full compliance with forms and regulations prescribed by the commission. The application shall include all information required by such forms.

B. An application shall be deemed incomplete for registration as an investment advisor representative unless the following executed forms, fee, and information are submitted:

Form U4.
The statutory fee made payable to FINRA in the amount of $40.
Evidence of passing: (i) the Uniform Investment Adviser Law Examination, Series 65; (ii) the Uniform Combined State Law Examination, Series 66, and the General Securities Representative Examination, Series 7; or (iii) a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates.
All individuals listed on Part 1 of Form ADV in Schedule A and Item 2. A. of Part 1B as having supervisory responsibilities of the investment advisor shall take and pass the examinations as required in subdivision 3 of this subsection, and register as a representative of the investment advisor.
Any other information the commission may require.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 1100, Case No. SEC870040, eff. July 2, 1987; amended, Virginia Register Volume 15, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 25, Issue 22, eff. July 1, 2009; Volume 29, Issue 20, eff. June 3, 2013; Volume 34, Issue 9, eff. December 1, 2017.

21VAC5-80-80 Expiration

The registration of an investment advisor representative shall expire annually at midnight on the 31st day of December unless renewed in accordance with 21VAC5-80-90.

History

Statutory Authority: § 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 1101, Case No. SEC870040, eff. July 2, 1987.

21VAC5-80-90 Renewals

To renew the registration of its investment advisor representatives, an investment advisor or federal covered advisor will be billed by IARD the statutory fee of $40 per investment advisor representative. A renewal of registration shall be granted as a matter of course upon payment of the proper fee or fees unless the registration was, or the renewal would be, subject to revocation under § 13.1-506 of the Act.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 1102, Case No. SEC870040, eff. July 2, 1987; amended by Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 15, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 29, Issue 20, eff. June 3, 2013; Volume 34, Issue 9, eff. December 1, 2017.

21VAC5-80-100 Updates and amendments

An investment advisor representative shall amend or update Form U4 as information becomes inaccurate. A Form U4 must be filed within 30 days of an amendment or update. All filings shall be made in compliance with all requirements of CRD.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 1103, Case No. SEC870040, eff. July 2, 1987; amended by Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 15, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 29, Issue 20, eff. June 3, 2013; Volume 41, Issue 24, eff. August 1, 2025.

21VAC5-80-110 Termination of registration

A. When an investment advisor representative terminates his registration with an investment advisor, or an investment advisor terminates an investment advisor representative's registration, the investment advisor shall file notice of such termination on Form U5 within 30 calendar days of the date of termination. All filings shall be made on CRD.

B. When an investment advisor representative terminates his registration with a federal covered advisor, the federal covered advisor shall file notice of such termination on Form U5 within 30 calendar days of the date of termination. All filings shall be made on CRD.

C. If a representative learns that the investment advisor has not filed the appropriate notice, the representative may file notice with the commission at its Division of Securities and Retail Franchising. The commission may terminate the representative's registration if the commission determines that an investment advisor (i) is no longer in existence, (ii) has ceased conducting securities business, or (iii) cannot reasonably be located.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 1104, Case No. SEC870040, eff. July 2, 1987; amended by Case No. SEC890040, eff. July 1, 1989; Case No. SEC910057, eff. July 1, 1991; Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 51, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 25, Issue 22, eff. July 1, 2009; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-80-120 Changing a connection from one investment advisor or federal covered advisor to another

An investment advisor representative who changes connection from one investment advisor or federal covered advisor to another shall comply with 21VAC5-80-70.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 1105, Case No. SEC870040, eff. July 2, 1987; amended by Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 13, Issue 25, eff. September 1, 1997.

21VAC5-80-130 Examination/qualification

A. An individual applying for registration as an investment advisor representative shall be required to provide evidence of passing within the two-year period immediately preceding the date of the application (i) the Uniform Investment Adviser Law Examination, Series 65; (ii) the Uniform Combined State Law Examination, Series 66 and the General Securities Representative Examination, Series 7; or (iii) a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates.

B. Any individual who meets the qualifications set forth in subsection A of this section and is registered as an investment advisor or investment advisor representative in any state jurisdiction requiring registration within the two-year period immediately preceding the date of the filing of an application shall not be required to satisfy the examination requirements set forth in subsection A of this section, except that the commission may require additional examinations for any individual found to have violated any federal or state securities laws.

C. The examination requirements shall not apply to an individual who currently holds and is in good standing under one of the following professional designations:

Certified Financial Planner (CFP) issued by the Certified Financial Planner Board of Standards, Inc.;
Chartered Financial Consultant (ChFC) awarded by The American College, Bryn Mawr, Pennsylvania;
Personal Financial Specialist (PFS) administered by the American Institute of Certified Public Accountants;
Chartered Financial Analyst (CFA) granted by the Association for Investment Management and Research;
Chartered Investment Counselor (CIC) granted by the Investment Counsel Association of America; or
Such other professional designation, after reasonable notice and subject to review by the commission, as the director of the division designates.

D. In lieu of meeting the examination requirement described in subsection A of this section, an applicant who meets all the qualifications set forth below may file with the commission at its division an executed Affidavit for Waiver of Examination (Form S.A.3).

No more than one other individual connected with the applicant's investment advisor is utilizing the waiver at the time the applicant files Form S.A.3.
The applicant is, and has been for at least the five years immediately preceding the date on which the application for registration is filed, actively engaged in the investment advisory business.
The applicant has been for at least the two years immediately preceding the date on which the application is filed the president, chief executive officer or chairman of the board of directors of an investment advisor organized in corporate form or the managing partner, member, trustee or similar functionary of an investment advisor organized in noncorporate form.
The investment advisor or advisors referred to in subdivision 3 of this subsection has been actively engaged in the investment advisory business and during the applicant's tenure as president, chief executive officer, chairman of the board of directors, or managing partner, member, trustee or similar functionary had at least $40 million under management.
The applicant verifies that he has read and is familiar with the investment advisor and investment advisor representative provisions of the Act and the provisions of Parts I through V of this chapter.
The applicant verifies that none of the questions in Item 14 (disciplinary history) on his Form U4 have been, or need be, answered in the affirmative.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 1106, Case No. SEC890040, eff. July 1, 1989; amended by Case No. SEC920008, eff. October 15, 1992; Virginia Register Volume 11, Issue 21, eff. July 1, 1995; Volume 13, Issue 25, eff. September 1, 1997; Errata, 13:26 VA.R. 3710 September 15, 1997; Volume 15, Issue 22, eff. July 1, 1999; Volume 25, Issue 22, eff. July 1, 2009; Volume 29, Issue 20, eff. June 3, 2013; Volume 31, Issue 25, eff. July 31, 2015.

21VAC5-80-140 (Repealed.)

History

Historical Notes: Derived from Rule 1200, Case No. SEC870040, eff. July 2, 1987; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 14, Issue 22, eff. July 1, 1998; repealed, Virginia Register Volume 25, Issue 22, eff. July 1, 2009.

21VAC5-80-145 (Repealed.)

History

Historical Notes: Derived from Virginia Register Volume 25, Issue 22, eff. July 1, 2009; amended, Virginia Register Volume 26, Issue 22, eff. July 1, 2010; repealed, Virginia Register Volume 29, Issue 20, eff. June 3, 2013.

Part III Investment Advisor, Federal Covered Advisor, and Investment Advisor Representative Regulations

21VAC5-80-146 Custody of client funds or securities by investment advisors

A. For purposes of this section the following definitions shall apply:

"Control" means the power, directly or indirectly, to direct the management or policies of a person whether through ownership of securities, by contract, or otherwise. Control includes:

Each of the investment advisor's officers, partners, or directors exercising executive responsibility (or persons having similar status or functions) is presumed to control the investment advisor.
A person is presumed to control a corporation if the person:

a. Directly or indirectly has the right to vote 25% or more of a class of the corporation's voting securities; or

b. Has the power to sell or direct the sale of 25% or more of a class of the corporation's voting securities;

A person is presumed to control a partnership if the person has the right to receive upon dissolution, or has contributed, 25% or more of the capital of the partnership;
A person is presumed to control a limited liability company if the person:

a. Directly or indirectly has the right to vote 25% or more of a class of the interests of the limited liability company;

b. Has the right to receive upon dissolution, or has contributed, 25% or more of the capital of the limited liability company;

c. Is an elected manager of the limited liability company; or

A person is presumed to control a trust if the person is a trustee or managing agent of the trust.

"Custody" means holding directly or indirectly, client funds or securities, or having any authority to obtain possession of them or has the ability to appropriate them. The investment advisor has custody if a related person holds, directly or indirectly, client funds or securities, or has any authority to obtain possession of them, in connection with advisory services the investment advisor provides to clients.

Custody includes:

a. Possession of client funds or securities unless the investment advisor receives them inadvertently and returns them to the sender promptly but in any case within three business days of receiving them;

b. Any arrangement (including general power of attorney) under which the investment advisor is authorized or permitted to withdraw client funds or securities maintained with a custodian upon the investment advisor's instruction to the custodian; and

c. 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 advisor or its supervised person legal ownership of or access to client funds or securities.

Receipt of checks drawn by clients and made payable to third parties will not meet the definition of custody if forwarded to the third party within three business days of receipt and the investment advisor maintains the records required under 21VAC5-80-160 A 23;

"Independent certified public accountant" means a certified public accountant that meets the standards of independence described in Rule 2-01(b) and (c) of Regulation S-X (17 CFR 210.2-01(b) and (c)).

"Independent party" means a person that:

Is engaged by the investment advisor to act as a gatekeeper for the payment of fees, expenses, and capital withdrawals from the pooled investment;
Does not control and is not controlled by and is not under common control with the investment advisor;
Does not have, and has not had within the past two years, a material business relationship with the investment advisor; and
Shall not negotiate or agree to have material business relations or commonly controlled relations with an investment advisor for a period of two years after serving as the person engaged in an independent party agreement.

"Independent representative" means a person who:

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 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;
Does not control, is not controlled by, and is not under common control with investment advisor; and
Does not have, and has not had within the past two years, a material business relationship with the investment advisor.

"Qualified custodian" means:

A bank or savings association that has deposits insured by the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act;
A broker-dealer registered in this jurisdiction and with the SEC holding the client assets in customer accounts;
A registered futures commission merchant registered under Section 4f(a) of the Commodity Exchange Act, 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
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.

"Related person" means any person, directly or indirectly, controlling or controlled by the investment advisor, and any person that is under common control with the investment advisor.

B. Requirements: It is unlawful and deemed to be a fraudulent, deceptive, or manipulative act, practice, or course of business for an investment advisor, registered or required to be registered, to have custody of client funds or securities unless:

The investment advisor notifies the commission promptly in writing that the investment advisor has or may have custody. Such notification is required to be given on Form ADV.
A qualified custodian maintains those 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 advisor's clients' funds and securities, under the investment advisor's name as agent or trustee for the clients, or, in the case of a pooled investment vehicle that the investment advisor manages, in the name of the pooled investment vehicle.

If an investment advisor opens an account with a qualified custodian on its client's behalf, under the client's name, under the name of the investment advisor as agent, or under the name of a pooled investment vehicle, the investment advisor must 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. If the investment advisor sends account statements to a client to which the investment advisor is required to provide this notice, and the investment advisor must include in the notification provided to that client and in any subsequent account statement the investment advisor sends that client a statement urging the client to compare the account statements from the custodian with those from the investment advisor.
The investment advisor has a reasonable basis, after due inquiry, for believing that the qualified custodian sends an account statement, at least quarterly, to each client for which it maintains funds or securities, identifying the amount of funds and of each security in the account at the end of the period and setting forth all transactions in the account during that period.
If the investment advisor or a related person is a general partner of a limited partnership (or managing member of a limited liability company, or holds a comparable position for another type of pooled investment vehicle):

a. The account statements required under subdivision 4 of this subsection must be sent to each limited partner (or member or other beneficial owner), and

b. The investment advisor must:

(1) Enter into a written agreement with an independent party who is obliged to act in the best interest of the limited partners, members, or other beneficial owners to review all fees, expenses and capital withdrawals from the pooled accounts;

(2) Send all invoices or receipts to the independent party, detailing the amount of the fee, expenses or capital withdrawal and the method of calculation such that the independent party can:

(a) Determine that the payment is in accordance with the pooled investment vehicle standards (generally the partnership agreement or membership agreement); and

(b) Forward, to the qualified custodian, approval for payment of the invoice with a copy to the investment advisor.

An independent certified public accountant, pursuant to a written agreement between the investment advisor and the independent certified public accountant, verifies by actual examination at least once during each calendar year the client funds and securities of which the investment advisor has custody. The time will be chosen by the independent certified public accountant without prior notice or announcement to the investment advisor and will be irregular from year to year. The written agreement must provide for the first examination to occur within six months of becoming subject to this subdivision, except that, if the investment advisor maintains client funds or securities pursuant to this section as a qualified custodian, the agreement must provide for the first examination to occur no later than six months after obtaining the internal control report. The written agreement must require the independent certified public accountant to:

a. File a certificate on Form ADV-E with the commission within 120 days of the time chosen by the independent certified public accountant in subdivision 6 of this subsection, stating that it has examined the funds and securities and describing the nature and extent of the examination;

b. Upon finding any material discrepancies during the course of the examination, notify the commission within one business day of the finding, by means of a facsimile transmission or electronic mail, followed by first class mail, directed to the attention of the commission; and

c. Upon resignation or dismissal from, or other termination of, the engagement, or upon removing itself or being removed from consideration for being reappointed, file within four business days Form ADV-E accompanied by a statement that includes:

(1) The date of such resignation, dismissal, removal, or other termination, and the name, address, and contact information of the independent certified public accountant; and

(2) An explanation of any problems relating to examination scope or procedure that contributed to such resignation, dismissal, removal, or other termination.

If the investment advisor maintains, or if the investment advisor has custody because a related person maintains, client funds or securities pursuant to this section as a qualified custodian in connection with advisory services the investment advisor provides to clients:

a. The independent certified public accountant the investment advisor retains to perform the independent verification required by subdivision 6 of this subsection must be registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by the Public Company Accounting Oversight Board in accordance with its rules; and

b. The investment advisor must obtain, or receive from its related person, within six months of becoming subject to this subdivision and thereafter no less frequently than once each calendar year a written internal control report prepared by an independent certified public accountant:

(1) The internal control report must include an opinion of an independent certified public accountant as to whether controls have been placed in operation as of a specific date, are suitably designed, and are operating effectively to meet control objectives relating to custodial services, including the safeguarding of funds and securities held by either the investment advisor or a related person on behalf of the investment advisors clients, during the year;

(2) The independent certified public accountant must verify that the funds and securities are reconciled to a custodian other than the investment advisor or the investment advisors related person; and

(3) The independent certified public accountant must be registered with and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by the Public Company Accounting Oversight Board in accordance with its rules.

A client may designate an independent representative to receive on his behalf notices and account statements as required under subdivisions 3 and 4 of this subsection.

C. Exceptions:

With respect to shares of an open-end company as defined in Section 5(a)(1) of the Investment Company Act of 1940 ("mutual fund"), the investment advisor may use the mutual fund's transfer agent in lieu of a qualified custodian for purposes of complying with subsection B of this section;
Certain privately offered securities are exempt, including:

a. The investment advisor is not required to comply with subdivision B 2 of this section with respect to securities that are:

(1) Acquired from the issuer in a transaction or chain of transactions not involving any public offering;

(2) Uncertificated and ownership thereof is recorded only on the books of the issuer or its transfer agent in the name of the client; and

(3) Transferable only with prior consent of the issuer or holders of the outstanding securities of the issuer.

b. Notwithstanding subdivision 2 a of this subsection, the provisions of this subdivision 2 are available with respect to securities held for the account of a limited partnership (or limited liability company, or other type of pooled investment vehicle) only if the limited partnership is audited, and the audited financial statements are distributed, as described in subdivision 4 of this subsection and the investment advisor notifies the commission in writing that the investment advisor intends to provide audited financial statements as described above. Such notification is required to be provided on Form ADV.

Notwithstanding subdivision B 6 of this section, an investment advisor is not required to obtain an independent verification of client funds and securities maintained by a qualified custodian if all of the following are met:

a. The investment advisor has custody of the funds and securities solely as a consequence of its authority to make withdrawals from client accounts to pay its advisory fee;

b. The investment advisor has written authorization from the client to deduct advisory fees from the account held with the qualified custodian;

c. Each time a fee is directly deducted from a client account, the investment advisor concurrently:

(1) Sends the qualified custodian or if subdivision B 5 of this section applies sends the independent party designated pursuant to subdivision B 5 b (2) of this section, an invoice or statement of the amount of the fee to be deducted from the client's account; and

(2) Sends the client an invoice or statement itemizing the fee. Itemization includes the formula used to calculate the fee, the amount of assets under management the fee is based on, and the time period covered by the fee. The invoice will notify the client that the custodian will not be checking the accuracy of the fees and this responsibility is the client's.

d. The investment advisor notifies the commission in writing that the investment advisor intends to use the safeguards provided above. Such notification is required to be given on Form ADV.

Check Item 9.A. on Form ADV Part 1A as "No" if the only reason the investment advisors have custody is because they engage in direct fee deduction. Item 2.I. of Form ADV Part 1B asks detailed questions that are more useful in determining associated risk.

An investment advisor is not required to comply with subdivisions B 3 and B 4 of this section and shall be deemed to have complied with subdivision B 6 of this section with respect to the account of a limited partnership (or limited liability company, or another type of pooled investment vehicle) if each of the following conditions are met:

a. The advisor sends to all limited partners (or members or other beneficial owners) at least quarterly, a statement, showing:

(1) The total amount of all additions to and withdrawals from the fund as a whole as well as the opening and closing value of the fund at the end of the quarter based on the custodian's records;

(2) A listing of all long and short positions on the closing date of the statement in accordance with FASB Rule Accounting Standards Codification (ASC) 946-210-50; and

(3) The total amount of additions to and withdrawals from the fund by the investor as well as the total value of the investor's interest in the fund at the end of the quarter.

The listing in subdivision 4 a (2) of this subsection follows FASB Rule Accounting Standards Codification (ASC) 946-210-50-6 whereby long and short positions representing more than 5.0% of the net assets of the fund must be reported as outlined in subsection 50-6 of the FASB Rule. All provisions of subsection 50-6 in the FASB Rule apply to the position disclosure required on the quarterly customer statement. This is the same reporting format required by Rule 13F under the Securities Exchange Act of 1934 for investment managers' annual reports.

b. At least annually the fund is subject to an audit and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) and the commission within 120 days of the end of its fiscal year;

c. The audit is performed by an independent certified public accountant that is registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by the Public Company Accounting Oversight Board in accordance with its rules;

d. Upon liquidation, the advisor distributes the fund's final audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) and the commission promptly after the completion of such audit;

e. The written agreement with the independent certified public accountant must require the independent certified public accountant to, upon resignation or dismissal from, or other termination of, the engagement, or upon removing itself or being removed from consideration for being reappointed, notify the commission within four business days accompanied by a statement that includes:

(1) The date of such resignation, dismissal, removal, or other termination, and the name, address, and contact information of the independent certified public accountant; and

(2) An explanation of any problems relating to audit scope or procedure that contributed to such resignation, dismissal, removal, or other termination.

f. The investment advisor must also notify the commission in writing that the investment advisor intends to employ the use of the statement delivery and audit safeguards described above. Such notification is required to be given on Form ADV.

The investment advisor is not required to comply with this section with respect to the account of an investment company registered under the Investment Company Act of 1940.
When a supervised person of an advisor serves as the executor, conservator, or trustee for an estate, conservatorship, or personal trust solely because the supervised person has been appointed in these capacities as a result of a family or personal relationship with the decedent, beneficiary, or grantor (but not a relationship resulting from a past or present client relationship with the advisor), the advisor will not be required to comply with the requirements of subsection B of this section if the advisor complies with the following:

a. Provides a written statement to each beneficial owner of the account setting forth a description of the requirements of subsection B of this section and includes the reasons why the investment advisor will not be required to comply with those requirements.

b. Obtains from each beneficial owner a signed and dated statement acknowledging the receipt of the written statement required under subdivision 6 a of this subsection.

c. Maintains a copy of both documents described in subdivisions 6 a and b of this subsection until the account is closed or the investment advisor is no longer executor, conservator, or trustee.

D. Delivery to related persons. Sending an account statement under subdivision B 5 of this section or distributing audited financial statements under subdivision C 4 of this section shall not satisfy the requirements of this section if such account statements or financial statements are sent solely to limited partners (or members or other beneficial owners) that themselves are limited partnerships (or limited liability companies, or another type of pooled investment vehicle) and are related persons.

History

Statutory Authority: § 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Virginia Register Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-80-150 Agency cross transactions

A. For purposes of this section, "agency cross transaction" means a transaction in which an investment advisor, or any person controlling, controlled by, or under common control with such investment advisor, including an investment advisor representative, acts as a broker-dealer for both the advisory client and the person on the other side of the transaction.

B. An investment advisor effecting an agency cross transaction for an advisory client shall comply with the following conditions; provided, that an investment advisor having its principal place of business outside this Commonwealth and registered or licensed, and in compliance with the applicable books and records requirements, in the state where its principal place of business is located, shall only be required to make, keep current, maintain and preserve such of the following required books, ledgers and records as are not in addition to those required under the laws of the state in which it maintains its principal place of business:

Obtain from the advisory client a written consent prospectively authorizing the investment advisor to effect agency cross transactions for such client.
Before obtaining such written consent from the client, disclose to the client in writing that, with respect to agency cross transactions, the investment advisor will act as broker-dealer for, receive commissions from and have a potentially conflicting division of loyalties and responsibilities regarding both parties to the transactions.
At or before the completion of each agency cross transaction, send the client a written confirmation. The written confirmation shall include (i) a statement of the nature of the transaction, (ii) the date the transaction took place (iii) an offer to furnish, upon request, the time when the transaction took place and (iv) the source and amount of any other remuneration the investment advisor received or will receive in connection with the transaction. In the case of a purchase, if the investment advisor was not participating in a distribution, or, in the case of a sale, if the investment advisor was not participating in a tender offer, the written confirmation may state whether the investment advisor has been receiving or will receive any other remuneration and that the investment advisor will furnish to the client the source and amount of such remuneration upon the client's written request.
At least annually, and with or as part of any written statement or summary of the account from the investment advisor, send each client a written disclosure statement identifying (i) the total number of agency cross transactions during the period since the date of the last such statement or summary and (ii) the total amount of all commissions or other remuneration the investment advisor received or will receive in connection with agency cross transactions during the period.
Each written disclosure and confirmation required by this section must include a conspicuous statement that the client may revoke the written consent required under subdivision B1 of this section at any time by providing written notice of revocation to the investment advisor.
No agency cross transaction may be effected in which the same investment advisor recommended the transaction to both any seller and any purchaser.

C. Nothing in this section shall be construed to relieve an investment advisor or investment advisor representative from acting in the best interests of the client, including fulfilling his duty with respect to the best price and execution for the particular transaction for the client nor shall it relieve any investment advisor or investment advisor representative of any other disclosure obligations imposed by the Act.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 1201, Case No. SEC870040, eff. July 2, 1987; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997.

21VAC5-80-160 Recordkeeping requirements for investment advisors

A. Every investment advisor registered or required to be registered under the Act shall make and keep true, accurate and current the following books, ledgers and records, except an investment advisor having its principal place of business outside this Commonwealth and registered or licensed, and in compliance with the applicable books and records requirements, in the state where its principal place of business is located, shall only be required to make, keep current, maintain and preserve such of the following required books, ledgers and records as are not in addition to those required under the laws of the state in which it maintains its principal place of business:

A journal, including cash receipts and disbursements records, and any other records of original entry forming the basis of entries in any ledger.
General and auxiliary ledgers (or other comparable records) reflecting asset, liability, reserve, capital, income and expense accounts.
A memorandum of each order given by the investment advisor for the purchase or sale of any security, of any instruction received by the investment advisor from the client concerning the purchase, sale, receipt or delivery of a particular security, and of any modification or cancellation of any such order or instruction. The memoranda shall show the terms and conditions of the order, instruction, modification or cancellation; shall identify the person connected with the investment advisor who recommended the transaction to the client and the person who placed the order; and shall show the account for which entered, the date of entry, and the bank, broker or dealer by or through whom executed where appropriate. Orders entered pursuant to the exercise of discretionary power shall be so designated.
All check books, bank statements, canceled checks and cash reconciliations of the investment advisor.
All bills or statements (or copies of), paid or unpaid, relating to the business as an investment advisor.
All trial balances, financial statements prepared in accordance with generally accepted accounting principles which shall include a balance sheet, income statement and such other statements as may be required pursuant to 21VAC5-80-180, and internal audit working papers relating to the investment advisor's business as an investment advisor.
Originals of all written communications received and copies of all written communications sent by the investment advisor relating to (i) any recommendation made or proposed to be made and any advice given or proposed to be given; (ii) any receipt, disbursement or delivery of funds or securities; and (iii) the placing or execution of any order to purchase or sell any security; however, (a) the investment advisor shall not be required to keep any unsolicited market letters and other similar communications of general public distribution not prepared by or for the investment advisor, and (b) if the investment advisor sends any notice, circular or other advertisement offering any report, analysis, publication or other investment advisory service to more than 10 persons, the investment advisor shall not be required to keep a record of the names and addresses of the persons to whom it was sent; except that if the notice, circular or advertisement is distributed to persons named on any list, the investment advisor shall retain with a copy of the notice, circular or advertisement a memorandum describing the list and the source thereof.
A list or other record of all accounts which list identifies the accounts in which the investment advisor is vested with any discretionary power with respect to the funds, securities or transactions of any client.
All powers of attorney and other evidences of the granting of any discretionary authority by any client to the investment advisor, or copies thereof.
All written agreements (or copies thereof) entered into by the investment advisor with any client, and all other written agreements otherwise related to the investment advisor's business as an investment advisor.
A file containing a copy of each notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication including by electronic media that the investment advisor circulates or distributes, directly or indirectly, to two or more persons (other than persons connected with the investment advisor), and if the notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication including by electronic media recommends the purchase or sale of a specific security and does not state the reasons for the recommendation, a memorandum of the investment adviser indicating the reasons for the recommendation.
a. A record of every transaction in a security in which the investment advisor or any investment advisory representative of the investment advisor has, or by reason of any transaction acquires, any direct or indirect beneficial ownership, except (i) transactions effected in any account over which neither the investment advisor nor any investment advisory representative of the investment advisor has any direct or indirect influence or control; and (ii) transactions in securities which are direct obligations of the United States. The record shall state the title and amount of the security involved; the date and nature of the transaction (i.e., purchase, sale or other acquisition or disposition); the price at which it was effected; and the name of the broker, dealer or bank with or through whom the transaction was effected. The record may also contain a statement declaring that the reporting or recording of any such transaction shall not be construed as an admission that the investment advisor or investment advisory representative has any direct or indirect beneficial ownership in the security. A transaction shall be recorded not later than 10 days after the end of the calendar quarter in which the transaction was effected.

b. For purposes of this subdivision 12, the following definitions will apply. The term "advisory representative" means any partner, officer or director of the investment advisor; any employee who participates in any way in the determination of which recommendations shall be made; any employee who, in connection with his duties, obtains any information concerning which securities are being recommended prior to the effective dissemination of the recommendations; and any of the following persons who obtain information concerning securities recommendations being made by the investment advisor prior to the effective dissemination of the recommendations:

(1) Any person in a control relationship to the investment adviser;

(2) Any affiliated person of a controlling person; and

(3) Any affiliated person of an affiliated person.

"Control" means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with the company. Any person who owns beneficially, either directly or through one or more controlled companies, more than 25% of the ownership interest of a company shall be presumed to control the company.

c. An investment advisor shall not be deemed to have violated the provisions of this subdivision 12 because of his failure to record securities transactions of any investment advisor representative if the investment advisor establishes that it instituted adequate procedures and used reasonable diligence to obtain promptly reports of all transactions required to be recorded.

a. Notwithstanding the provisions of subdivision 12 of this subsection, where the investment advisor is primarily engaged in a business other than advising investment advisory clients, a record must be maintained of every transaction in a security in which the investment advisor or any investment advisory representative of such investment advisor has, or by reason of such transaction acquires, any direct or indirect beneficial ownership, except (i) transactions effected in any account over which neither the investment advisor nor any investment advisory representative of the investment advisor has any direct or indirect influence or control; and (ii) transactions in securities which are direct obligations of the United States. The record shall state the title and amount of the security involved; the date and nature of the transaction (i.e., purchase, sale or other acquisition or disposition); the price at which it was effected; and the name of the broker, dealer or bank with or through whom the transaction was effected. The record may also contain a statement declaring that the reporting or recording of any such transaction shall not be construed as an admission that the investment advisor or investment advisory representative has any direct or indirect beneficial ownership in the security. A transaction shall be recorded not later than 10 days after the end of the calendar quarter in which the transaction was effected.

b. An investment advisor is "primarily engaged in a business other than advising investment advisory clients" when, for each of its most recent three fiscal years or for the period of time since organization, whichever is less, the investment advisor derived, on an unconsolidated basis, more than 50% of (i) its total sales and revenues, and (ii) its income (or loss) before income taxes and extraordinary items, from such other business.

c. For purposes of this subdivision 13, the following definitions will apply. The term "advisory representative," when used in connection with a company primarily engaged in a business other than advising investment advisory clients, means any partner, officer, director or employee of the investment advisor who participates in any way in the determination of which recommendation shall be made, or whose functions or duties relate to the determination of which securities are being recommended prior to the effective dissemination of the recommendations; and any of the following persons, who obtain information concerning securities recommendations being made by the investment advisor prior to the effective dissemination of the recommendations or of the information concerning the recommendations:

(1) Any person in a control relationship to the investment advisor;

(2) Any affiliated person of a controlling person; and

(3) Any affiliated person of an affiliated person.

d. An investment advisor shall not be deemed to have violated the provisions of this subdivision 13 because of his failure to record securities transactions of any investment advisor representative if he establishes that he instituted adequate procedures and used reasonable diligence to obtain promptly reports of all transactions required to be recorded.

A copy of each written statement and each amendment or revision, given or sent to any client or prospective client of such investment advisor in accordance with the provisions of 21VAC5-80-190 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.
For each client that was obtained by the advisor by means of a solicitor to whom a cash fee was paid by the advisor, the following:

a. Evidence of a written agreement to which the advisor is a party related to the payment of such fee;

b. A signed and dated acknowledgement of receipt from the client evidencing the client's receipt of the investment advisor's disclosure statement and a written disclosure statement of the solicitor; and

c. A copy of the solicitor's written disclosure statement. The written agreement, acknowledgement and solicitor disclosure statement will be considered to be in compliance if such documents are in compliance with Rule 275.206(4)-3 of the Investment Advisers Act of 1940.

For purposes of this regulation, the term "solicitor" means any person or entity who, for compensation, acts as an agent of an investment advisor in referring potential clients.

All accounts, books, internal working papers, and any other records or documents that are necessary to form the basis for or demonstrate the calculation of the performance or rate of return of all managed accounts or securities recommendations in any notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication including electronic media that the investment advisor circulates or distributes directly or indirectly, to two or more persons (other than persons connected with the investment advisor); however, with respect to the performance of managed accounts, the retention of all account statements, if they reflect all debits, credits, and other transactions in a client's account for the period of the statement, and all worksheets necessary to demonstrate the calculation of the performance or rate of return of all managed accounts shall be deemed to satisfy the requirements of this subdivision.
A file containing a copy of all written communications received or sent regarding any litigation involving the investment advisor or any investment advisor representative or employee, and regarding any written customer or client complaint.
Written information about each investment advisory client that is the basis for making any recommendation or providing any investment advice to the client.
Written procedures to supervise the activities of employees and investment advisor representatives that are reasonably designed to achieve compliance with applicable securities laws and regulations.
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 advisor representatives, which file should contain, but is not limited to, all applications, amendments, renewal filings, and correspondence.
Any records documenting dates, locations and findings of the investment advisor's annual review of these policies and procedures conducted pursuant to subdivision F of 21VAC5-80-170.
Copies, with original signatures of the investment advisor's appropriate signatory and the investment advisor representative, of each initial Form U4 and each amendment to Disclosure Reporting Pages (DRPs U4) must be retained by the investment advisor (filing on behalf of the investment advisor representative) and must be made available for inspection upon regulatory request.
Where the advisor inadvertently held or obtained a client's securities or funds and returned them to the client within three business days or has forwarded third party checks within three business days of receipt, the advisor will be considered as not having custody but shall keep the following record to identify all securities or funds held or obtained relating to the inadvertent custody:

A ledger or other listing of all securities or funds held or obtained, including the following information:

a. Issuer;

b. Type of security and series;

c. Date of issue;

d. For debt instruments, the denomination, interest rate and maturity date;

e. Certificate number, including alphabetical prefix or suffix;

f. Name in which registered;

g. Date given to the advisor;

h. Date sent to client or sender;

i. Form of delivery to client or sender, or copy of the form of delivery to client or sender; and

j. Mail confirmation number, if applicable, or confirmation by client or sender of the fund's or security's return.

If an investment advisor obtains possession of securities that are acquired from the issuer in a transaction or chain of transactions not involving any public offering that comply with the exception from custody under subdivision C 2 of 21VAC5-80-146, the advisor shall keep the following records:

a. A record showing the issuer or current transfer agent's name address, phone number, and other applicable contract information pertaining to the party responsible for recording client interests in the securities; and

b. A copy of any legend, shareholder agreement, or other agreement showing that those securities that are transferable only with prior consent of the issuer or holders of the outstanding securities of the issuer.

Any records required pursuant to 21VAC5-80-260.

B. 1. If an investment advisor subject to subsection A of this section has custody or possession of securities or funds of any client, the records required to be made and kept under subsection A of this section shall also include:

a. A journal or other record showing all purchases, sales, receipts and deliveries of securities (including certificate numbers) for such accounts and all other debits and credits to the accounts.

b. A separate ledger account for each client showing all purchases, sales, receipts and deliveries of securities, the date and price of each purchase and sale, and all debits and credits.

c. Copies of confirmations of all transactions effected by or for the account of any client.

d. A record for each security in which any client has a position, which record shall show the name of each client having any interest in each security, the amount or interest of each client, and the location of each security.

e. A copy of any records required to be made and kept under 21VAC5-80-146.

f. A copy of any and all documents executed by the client (including a limited power of attorney) under which the advisor is authorized or permitted to withdraw a client's funds or securities maintained with a custodian upon the advisor's instruction to the custodian.

g. A copy of each of the client's quarterly account statements as generated and delivered by the qualified custodian. If the advisor also generates a statement that is delivered to the client, the advisor shall also maintain copies of such statements along with the date such statements were sent to the clients.

h. If applicable to the advisor's situation, a copy of the special examination report verifying the completion of the examination by an independent certified public accountant and describing the nature and extent of the examination.

i. A record of any finding by the independent certified public accountant of any material discrepancies found during the examination.

j. If applicable, evidence of the client's designation of an independent representative.

If an investment advisor has custody because it advises a pooled investment vehicle, as defined in 21VAC5-80-146 A in the definition of custody in subdivision 1 c, the advisor shall also keep the following records:

a. True, accurate, and current account statements;

b. Where the advisor complies with 21VAC5-80-146 C 4, the records required to be made and kept shall include:

(1) The date of the audit;

(2) A copy of the audited financial statements; and

(3) Evidence of the mailing of the audited financial to all limited partners, members, or other beneficial owners within 120 days of the end of its fiscal year.

c. Where the advisor complies with 21VAC5-80-146 B 5, the records required to be made and kept shall include:

(1) A copy of the written agreement with the independent party reviewing all fees and expenses, indicating the responsibilities of the independent third party.

(2) Copies of all invoices and receipts showing approval by the independent party for payment through the qualified custodian.

C. Every investment advisor subject to subsection A of this section who renders any investment advisory or management service to any client shall, with respect to the portfolio being supervised or managed and to the extent that the information is reasonably available to or obtainable by the investment advisor, make and keep true, accurate and current:

Records showing separately for each client the securities purchased and sold, and the date, amount and price of each purchase and sale.
For each security in which any client has a current position, information from which the investment advisor can promptly furnish the name of each client and the current amount or interest of the client.

D. Any books or records required by this section may be maintained by the investment advisor in such manner that the identity of any client to whom the investment advisor renders investment advisory services is indicated by numerical or alphabetical code or some similar designation.

E. Every investment advisor subject to subsection A of this section shall preserve the following records in the manner prescribed:

All books and records required to be made under the provisions of subsection A through subdivision C 1, inclusive, of this section, except for books and records required to be made under the provisions of subdivisions A 11 and A 16 of this section, shall be maintained in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the last entry was made on record, the first two years of which shall be maintained in the principal office of the investment advisor.
Partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment advisor and of any predecessor, shall be maintained in the principal office of the investment advisor and preserved until at least three years after termination of the enterprise.
Books and records required to be made under the provisions of subdivisions A 11 and A 16 of this section shall be maintained in an easily accessible place for a period of not less than five years, the first two years of which shall be maintained in the principal office of the investment advisor, from the end of the fiscal year during which the investment advisor last published or otherwise disseminated, directly or indirectly, the notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication including by electronic media.
Books and records required to be made under the provisions of subdivisions A 17 through A 22, inclusive, of this section shall be maintained and preserved in an easily accessible place for a period of not less than five years, from the end of the fiscal year during which the last entry was made on such record, the first two years in the principal office of the investment advisor, or for the time period during which the investment advisor was registered or required to be registered in the state, if less.
Notwithstanding other record preservation requirements of this subsection, the following records or copies shall be required to be maintained at the business location of the investment advisor from which the customer or client is being provided or has been provided with investment advisory services: (i) records required to be preserved under subdivisions A 3, A 7 through A 10, A 14 and A 15, A 17 through A 19, subsections B and C and (ii) the records or copies required under the provision of subdivisions A 11 and A 16 of this section which records or related records identify the name of the investment advisor representative providing investment advice from that business location, or which identify the business locations' physical address, mailing address, electronic mailing address, or telephone number. The records will be maintained for the period described in this subsection.

F. Every investment advisor shall establish and maintain a written disaster recovery plan that shall address at a minimum:

The identity of individuals that will conduct or wind down business on behalf of the investment advisor in the event of death or incapacity of key persons;
Means to provide notification to clients of the investment advisor and to those states in which the advisor is registered of the death or incapacity of key persons;

a. Notification shall be provided to the Division of Securities and Retail Franchising via IARD/CRD within 24 hours of the death or incapacity of key persons.

b. Notification shall be given to clients within five business days from the death or incapacity of key persons.

Means for clients' accounts to continue to be monitored until an orderly liquidation, distribution or transfer of the clients' portfolio to another advisor can be achieved or until an actual notice to the client of investment advisor death or incapacity and client control of their assets occurs;
Means for the credit demands of the investment advisor to be met; and
Data backups sufficient to allow rapid resumption of the investment advisor's activities.

G. An investment advisor subject to subsection A of this section, before ceasing to conduct or discontinuing business as an investment advisor, shall arrange for and be responsible for the preservation of the books and records required to be maintained and preserved under this section for the remainder of the period specified in this section, and shall notify the commission in writing of the exact address where the books and records will be maintained during such period.

H. 1. The records required to be maintained pursuant to this section may be immediately produced or reproduced by photograph on film or, as provided in subdivision 2 of this subsection, on magnetic disk, tape or other computer storage medium, and be maintained for the required time in that form. If records are preserved or reproduced by photographic film or computer storage medium, the investment advisor shall:

a. Arrange the records and index the films or computer storage medium so as to permit the immediate location of any particular record;

b. Be ready at all times to promptly provide any facsimile enlargement of film or computer printout or copy of the computer storage medium which the commission by its examiners or other representatives may request;

c. Store separately from the original one other copy of the film or computer storage medium for the time required;

d. With respect to records stored on computer storage medium, maintain procedures for maintenance of, and access to, records so as to reasonably safeguard records from loss, alteration, or destruction; and

e. With respect to records stored on photographic film, at all times have available, for the commission's examination of its records, facilities for immediate, easily readable projection of the film and for producing easily readable facsimile enlargements.

Pursuant to subdivision 1 of this subsection, an advisor may maintain and preserve on computer tape or disk or other computer storage medium records which, in the ordinary course of the advisor's business, are created by the advisor on electronic media or are received by the advisor solely on electronic media or by electronic transmission.

I. Any book or record made, kept, maintained, and preserved in compliance with SEC Rules 17a-3 (17 CFR 240.17a-3) and 17a-4 (17 CFR 240.17a-4) under the Securities Exchange Act of 1934, which is substantially the same as the book, or other record required to be made, kept, maintained, and preserved under this section shall be deemed to be made, kept, maintained, and preserved in compliance with this section.

J. For purposes of this section, "investment supervisory services" means the giving of continuous advice as to the investment of funds on the basis of the individual needs of each client; and "discretionary power" shall not include discretion as to the price at which or the time when a transaction is or is to be effected if, before the order is given by the investment advisor, the client has directed or approved the purchase or sale of a definite amount of the particular security.

K. For purposes of this section, "principal place of business" and "principal office" mean the executive office of the investment advisor from which the officers, partners, or managers of the investment advisor direct, control, and coordinate the activities of the investment advisor.

L. Every investment advisor registered or required to be registered in this Commonwealth and has its principal place of business in a state other than the Commonwealth shall be exempt from the requirements of this section to the extent provided by the National Securities Markets Improvement Act of 1996 (Pub. L. No. 104-290), provided the investment advisor is licensed in such state and is in compliance with such state's recordkeeping requirements.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 1202, Case No. SEC870040, eff. July 2, 1987; amended by Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 14, Issue 22, eff. July 1, 1998; Volume 15, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 23, Issue 23, eff. July 1, 2007; Volume 25, Issue 22, eff. July 1, 2009; Volume 26, Issue 22, eff. July 1, 2010; Volume 29, Issue 20, eff. June 3, 2013; Volume 36, Issue 2, eff. September 16, 2019.

21VAC5-80-170 Supervision of investment advisor representatives

A. An investment advisor shall be responsible for the acts, practices, and conduct of its investment advisor representatives in connection with advisory services until such time as the investment advisor representatives have been properly terminated as provided by 21VAC5-80-110.

B. Every investment advisor shall exercise diligent supervision over the advisory activities of all of its investment advisor representatives.

C. Every investment advisor representative employed by an investment advisor shall be subject to the supervision of a supervisor designated by such investment advisor. The supervisor may be the investment advisor in the case of a sole proprietor, or a partner, officer, office manager or any qualified investment advisor representative in the case of entities other than sole proprietorships. All designated supervisors shall exercise reasonable supervision over the advisory activities of all investment advisor representatives under their responsibility.

D. As part of its responsibility under this section, every investment advisor, except entities employing no more than one investment advisor representative, shall establish, maintain and enforce written procedures, a copy of which shall be kept in each business office, which shall set forth the procedures adopted by the investment advisor to comply with the Act and associated regulations, which shall include but not be limited to the following duties imposed by this section; provided that an investment advisor having its principal place of business outside this Commonwealth and registered or licensed, and in compliance with the applicable books and records requirements, in the state where its principal place of business is located, shall only be required to make, keep current, maintain and preserve such of the following required books, ledgers and records as are not in addition to those required under the laws of the state in which it maintains its principal place of business:

The review and written approval by the designated supervisor of the opening of each new client account;
The frequent examination of all client accounts to detect and prevent irregularities or abuses;
The prompt review and written approval by a designated supervisor of all advisory transactions by investment advisor representatives and of all correspondence pertaining to the solicitation or execution of all advisory transactions by investment advisor representatives;
The prompt review and written approval of the handling of all client complaints.

E. Every investment advisor who has designated more than one supervisor pursuant to subsection C of this section shall designate from among its partners, officers, or other qualified investment advisor representatives, a person or group of persons, independent from the designated business supervisor or supervisors who shall supervise and periodically review the activities of the supervisors designated pursuant to subsection C of this section. All supervisors designated pursuant to this subsection E shall exercise reasonable supervision over the supervisors under their responsibility to ensure compliance with this subsection.

F. Every investment advisor who has more than one business office where its investment advisor representatives offer investment advisory related services shall no less often than annually, conduct an independent physical inspection of each business office under his supervision to ensure (i) investment advisor representatives at the respective business office are in compliance with the statutory provisions of the Act or associated regulations promulgated by the commission and (ii) the written procedures and compliance requirements are being enforced.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 1203, Case No. SEC870040, eff. July 2, 1987; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 14, Issue 22, eff. July 1, 1998; Volume 26, Issue 22, eff. July 1, 2010; Volume 29, Issue 20, eff. June 3, 2013; Errata, 29:24 VA.R. 3429 July 29, 2013.

21VAC5-80-180 Requirements for surety bonds and financial reporting

A. Investment advisors required to provide a balance sheet pursuant to Part 2A, Item 18 of Form ADV must demonstrate a net worth in excess of $25,000. In the case of an investment advisor that is registered in the state in which it maintains its principal place of business, its balance sheet must demonstrate that it is in compliance with the state's net worth or net capital requirements (as the case may be).

B. Investment advisors who maintain their principal place of business in the Commonwealth of Virginia and are subject to subsection A of this section, whose net worth drops below $25,001, must notify the Division of Securities and Retail Franchising within 24 hours of initial awareness of the discrepancy and immediately take action to establish a net worth in excess of $25,000 or obtain a surety bond in the penalty amount of $25,000. The surety bond form must be utilized. Additionally, within 24 hours after transmitting such notice, the investment advisor shall file a report with the Division of Securities and Retail Franchising of its financial condition, including the following:

A trial balance of all ledger accounts.
A computation of net worth.
A statement of all client funds or securities which are not segregated.
A computation of the aggregate amount of client ledger debit balances.
A statement as to the number of client accounts.

C. An investment advisor registered in the state in which it maintains its principal place of business and subject to subsection A of this section whose net worth or net capital (as the case may be) drops below the state's requirement, must notify the Division of Securities and Retail Franchising within 24 hours of initial awareness of the discrepancy and immediately take action to establish a net worth or net capital that is in compliance with the state's requirement. Additionally, within 24 hours after transmitting such notice, the investment advisor shall file a report with the Division of Securities and Retail Franchising of its financial condition, including the following:

A trial balance of all ledger accounts.
A computation of net worth or net capital.
A statement of all client funds or securities which are not segregated.
A computation of the aggregate amount of client ledger debit balances.
A statement as to the number of client accounts.

History

Statutory Authority: §§ 12.1-13 and 13.1-523 of the Code of Virginia.
Historical Notes: Derived from Rule 1204, Case No. SEC870040, eff. July 2, 1987; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 15, Issue 22, eff. July 1, 1999; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-80-190 Disclosure requirements

A. For purposes of compliance with § 13.1-505.1 of the Act, a copy of Part 2 of Form ADV must be given to clients of investment advisors.

B. The investment advisor or its registered representatives shall deliver the disclosure information required by this section to an advisory client or prospective advisory client:

Not less than 48 hours prior to entering into any investment advisory contract with such client or prospective client, or
At the time of entering into any such contract, if the advisory client has a right to terminate the contract without penalty within five calendar days after entering into the contract.

C. The investment advisor, or its registered representatives, shall offer to deliver the disclosure information required by this section to an advisory client or prospective advisory client annually, within 90 days of any investment advisor's fiscal year end.

D. A copy of Part 2 of Form ADV to be given to clients must be filed by investment advisors with the commission at its Division of Securities and Retail Franchising not later than the time of its use.

E. An investment advisor and its representative who receives compensation for assisting a client in the selection of another investment advisor may only assist that client in the selection of another investment advisor pursuant to a written agreement between the assisting investment advisor and the other investment advisor. The written agreement must describe the assisting activities and compensation, contain the assisting investment advisor's undertaking to perform consistent with the other investment advisor's instructions, and require that the assisting investment advisor representative provide the prospective clients with written disclosure documents of the assisting investment advisor and the other investment advisor. The disclosure document of an investment advisor who assists clients in the selection of another investment advisor shall always contain the following information in addition to other information required by subsection A of this section:

The name of the assisting investment advisor representative;
The name of the other investment advisor;
The nature of the relationship, including any affiliation between the assisting investment advisor representative and the other investment advisor;
A statement that the assisting investment advisor representative will be compensated for his services by the other investment advisor;
The terms of such compensation arrangement, including a description of the compensation paid to the assisting investment advisor representative;
Compensation differentials charged to clients above the normal other investment advisor's fee, as a result of the cost of obtaining clients by compensating the assisting investment advisor representative.

History

Statutory Authority: §§ 12.1-13 and 13.1-523.1 of the Code of Virginia.
Historical Notes: Derived from Rule 1205, Case No. SEC870040, eff. July 2, 1987; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 19, Issue 23, eff. July 1, 2003; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-80-200 Dishonest or unethical practices

A. An investment advisor or federal covered advisor is a fiduciary and has a duty to act primarily for the benefit of the advisor's clients. While the extent and nature of this duty varies according to the nature of the relationship between an investment advisor or federal covered advisor and the advisor's clients and the circumstances of each case, an investment advisor or federal covered advisor who is registered or required to be registered shall not engage in unethical practices, including the following:

Recommending to a client to whom investment supervisory, management, or consulting services are provided the purchase, sale, or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the client on the basis of information furnished by the client after reasonable inquiry concerning the client's investment objectives, financial situation, risk tolerance and needs, and any other information known or acquired by the investment advisor or federal covered advisor after reasonable examination of the client's financial records.
Placing an order to purchase or sell a security for the account of a client without written authority to do so.
Placing an order to purchase or sell a security for the account of a client upon instruction of a third party without first having obtained a written third-party authorization from the client.
Exercising any discretionary power in placing an order for the purchase or sale of securities for a client without obtaining written discretionary authority from the client within 10 business days after the date of the first transaction placed pursuant to oral discretionary authority, unless the discretionary power relates solely to the price at which, or the time when, an order involving a definite amount of a specified security shall be executed, or both.
Inducing trading in a client's account that is excessive in size or frequency in view of the financial resources, investment objectives, and character of the account.
Borrowing money or securities from a client unless the client is a broker-dealer, an affiliate of the investment advisor or federal covered advisor, or a financial institution engaged in the business of loaning funds or securities.
Loaning money to a client unless the investment advisor or federal covered advisor is a financial institution engaged in the business of loaning funds or the client is an affiliate of the investment advisor or federal covered advisor.
Misrepresenting to any advisory client, or prospective advisory client, the qualifications of the investment advisor or federal covered advisor, or misrepresenting the nature of the advisory services being offered or fees to be charged for the services, or omission to state a material fact necessary to make the statements made regarding qualifications services or fees, in light of the circumstances under which the statements are made, not misleading.
Providing a report or recommendation to any advisory client prepared by someone other than the investment advisor or federal covered advisor without disclosing that fact. This prohibition does not apply to a situation where the advisor uses published research reports or statistical analyses to render advice or where an advisor orders such a report in the normal course of providing service.
Charging a client an unreasonable advisory fee in light of the fees charged by other investment advisors or federal covered advisors providing essentially the same services.
Failing to disclose to clients in writing before any advice is rendered any material conflict of interest relating to the investment advisor or federal covered advisor or any of the advisor's employees that could reasonably be expected to impair the rendering of unbiased and objective advice, including:

a. Compensation arrangements connected with advisory services to clients that are in addition to compensation from such clients for such services; or

b. Charging a client an advisory fee for rendering advice when a commission for executing securities transactions pursuant to such advice will be received by the advisor or the advisor's employees.

Guaranteeing a client that a specific result will be achieved as a result of the advice that will be rendered.
Directly or indirectly using any advertisement that does not comply with SEC Rule 206(4)-1 under the Investment Advisers Act of 1940 or does any one of the following:

a. Refers to past specific recommendations of the investment advisor or investment advisor representative that were or would have been profitable to any person; except that an investment advisor or investment advisor representative may furnish or offer to furnish a list of all recommendations made by the investment advisor or investment advisor representative within the immediately preceding period of not less than one year if the advertisement or list also includes both of the following:

(1) The name of each security recommended, the date and nature of each recommendation, the market price at that time, the price at which the recommendation was to be acted upon, and the most recently available market price of each security; and

(2) A legend on the first page in prominent print or type that states that the reader should not assume that recommendations made in the future will be profitable or will equal the performance of the securities in the list;

b. Represents that any graph, chart, formula, or other device being offered can be used to determine which securities to buy or sell, or when to buy or sell them; or that represents, directly or indirectly, that any graph, chart, formula, or other device being offered will assist any person in making that person's own decisions as to which securities to buy or sell, or when to buy or sell them, without prominently disclosing in the advertisement the limitations thereof and the risks associated to its use;

c. Represents that any report, analysis, or other service will be furnished for free or without charge, unless the report, analysis, or other service actually is or will be furnished entirely free and without any direct or indirect condition or obligation;

d. Represents that the commission has approved any advertisement; or

e. Contains any untrue statement of a material fact or that is otherwise false or misleading.

For the purposes of this section, the term "advertisement" has the same meaning as in Rule 206(4)-1(e)(1) under the Investment Advisers Act of 1940.

Disclosing the identity, affairs, or investments of any client to any third party unless required by law or an order of a court or a regulatory agency to do so, or unless consented to by the client.
Taking any action, directly or indirectly, with respect to those securities or funds in which any client has any beneficial interest, where the investment advisor has custody or possession of such securities or funds, when the investment advisor's action is subject to and does not comply with the safekeeping requirements of 21VAC5-80-146.
Entering into, extending, or renewing any investment advisory contract unless the contract is in writing and discloses, in substance, the services to be provided, the term of the contract, the advisory fee, the formula for computing the fee, the amount of prepaid fee to be returned in the event of contract termination or nonperformance, whether the contract grants discretionary power to the investment advisor or federal covered advisor, and that no assignment of such contract shall be made by the investment advisor or federal covered advisor without the consent of the other party to the contract.
Failing to clearly and separately disclose to its customer, prior to any security transaction, providing investment advice for compensation or any materially related transaction that the customer's funds or securities will be in the custody of an investment advisor or contracted custodian in a manner that does not provide Securities Investor Protection Corporation protection or equivalent third-party coverage over the customer's assets.
Using a certification or professional designation in connection with 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.

a. The use of such certification or professional designation includes the following:

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

(2) Use of a nonexistent or self-conferred certification or professional designation;

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

(a) Is primarily engaged in the business of instruction in sales or marketing;

(b) Does not have reasonable standards or procedures for ensuring the competency of its designees or certificants;

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

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

b. There is a rebuttable presumption that a designating or certifying organization is not disqualified solely for purposes of subdivision 18 a (4) of this subsection, when the organization has been accredited by:

(1) The American National Standards Institute;

(2) The Institute for Credentialing Excellence (formerly the National Commission for Certifying Agencies); or

(3) 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 or marketing.

(2) The manner in which those words are combined.

(1) Indicates seniority within the organization; or

(2) Specifies an individual's area of specialization within the organization.

e. Nothing in this regulation shall limit the commission's authority to enforce existing provisions of the law.

B. An investment advisor representative is a fiduciary and has a duty to act primarily for the benefit of the representative's clients. While the extent and nature of this duty varies according to the nature of the relationship between an investment advisor representative and the representative's clients and the circumstances of each case, an investment advisor representative who is registered or required to be registered shall not engage in unethical practices, including the following:

Recommending to a client to whom investment supervisory, management, or consulting services are provided the purchase, sale, or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the client on the basis of information furnished by the client after reasonable inquiry concerning the client's investment objectives, financial situation and needs, and any other information known or acquired by the investment advisor representative after reasonable examination of the client's financial records.
Placing an order to purchase or sell a security for the account of a client without written authority to do so.
Placing an order to purchase or sell a security for the account of a client upon instruction of a third party without first having obtained a written third-party authorization from the client.
Exercising any discretionary power in placing an order for the purchase or sale of securities for a client without obtaining written discretionary authority from the client within 10 business days after the date of the first transaction placed pursuant to oral discretionary authority, unless the discretionary power relates solely to the price at which, or the time when, an order involving a definite amount of a specified security shall be executed, or both.
Inducing trading in a client's account that is excessive in size or frequency in view of the financial resources, investment objectives, and character of the account.
Borrowing money or securities from a client unless the client is a broker-dealer, an affiliate of the investment advisor representative, or a financial institution engaged in the business of loaning funds or securities.
Loaning money to a client unless the investment advisor representative is engaged in the business of loaning funds or the client is an affiliate of the investment advisor representative.
Misrepresenting to any advisory client, or prospective advisory client, the qualifications of the investment advisor representative, or misrepresenting the nature of the advisory services being offered or fees to be charged for the services, or omission to state a material fact necessary to make the statements made regarding qualifications, services or fees, in light of the circumstances under which the statements are made, not misleading.
Providing a report or recommendation to any advisory client prepared by someone other than the investment advisor or federal covered advisor who the investment advisor representative is employed by or associated with without disclosing that fact. This prohibition does not apply to a situation where the investment advisor or federal covered advisor uses published research reports or statistical analyses to render advice or where an investment advisor or federal covered advisor orders such a report in the normal course of providing service.
Charging a client an unreasonable advisory fee in light of the fees charged by other investment advisor representatives providing essentially the same services.
Failing to disclose to clients in writing before any advice is rendered any material conflict of interest relating to the investment advisor representative that could reasonably be expected to impair the rendering of unbiased and objective advice, including:

a. Compensation arrangements connected with advisory services to clients that are in addition to compensation from such clients for such services; or

b. Charging a client an advisory fee for rendering advice when a commission for executing securities transactions pursuant to such advice will be received by the investment advisor representative.

Guaranteeing a client that a specific result will be achieved as a result of the advice that will be rendered.
Directly or indirectly using any advertisement that does not comply with SEC Rule 206(4)-1 under the Investment Advisers Act of 1940 or does any one of the following:

d. Represents that the commission has approved any advertisement; or

e. Contains any untrue statement of a material fact, or that is otherwise false or misleading.

For the purposes of this section, the term "advertisement" has the same meaning as in Rule 206(4)-1(e)(1) under the Investment Advisers Act of 1940.

Disclosing the identity, affairs, or investments of any client to any third party unless required by law or an order of a court or a regulatory agency to do so, or unless consented to by the client.
Taking any action, directly or indirectly, with respect to those securities or funds in which any client has any beneficial interest, where the investment advisor representative other than a person associated with a federal covered advisor has custody or possession of such securities or funds, when the investment advisor representative's action is subject to and does not comply with the safekeeping requirements of 21VAC5-80-146.
Entering into, extending, or renewing any investment advisory or federal covered advisory contract unless such 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 prepaid fee to be returned in the event of contract termination or nonperformance, whether the contract grants discretionary power to the investment advisor representative, and that no assignment of such contract shall be made by the investment advisor representative without the consent of the other party to the contract.
Failing to clearly and separately disclose to its customer, prior to any security transaction, providing investment advice for compensation or any materially related transaction that the customer's funds or securities will be in the custody of an investment advisor or contracted custodian in a manner that does not provide Securities Investor Protection Corporation protection or equivalent third-party coverage over the customer's assets.
Using a certification or professional designation in connection with 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.