Michigan’s new Uniform Securities Act (2002)(the “Act”) is effective October 1, 2009, and imposes new requirements for investment advisers and investment adviser representatives. On September 1, 2009, OFIR Commissioner Ken Ross issued OFIR Bulletin 2009-14-SEC (the “Bulletin”), to which is attached the “Transition Order Administering Michigan Uniform Securities Act, 2008 PA 551” (the “Transition Order”) recognizing that it make take up to six months for OFIR to complete the process of promulgating new administrative rules to implement the Act, particularly the requirement for registration of investment adviser representatives (“IARs”), as discussed in detail below. The Bulletin and the Transition Order are available at http://www.michigan.gov/documents/ dleg/2009-14-SEC_291025_7.pdf.
In the Transition Order, Commissioner Ross, who is also the Administrator under the Act, designates the Central Registration Depository (CRD) or the Investment Adviser Registration Depository (IARD), which are operated by FINRA, to receive and store filings and collect fees from all persons required to register or notice file under the Act. Applicants, registrants and notice filers are directed to use the North American Securities Administrators Associations forms, which are available at the NASAA website (www.nasaa.org), the Web CRD/IARD site (www.iard.com) or the OFIR website (www.michigan.gov/ofir). All of the Administrator’s previously-issued orders relating to custodial standards, practices and conditions for broker-dealers and investment advisers will continue in full force and effect until withdrawn or modified by rules or future orders.
- The Act provides some new, but limited, exemptions from the adviser registration requirements. The following are exempt:
- A person that does not have a place of business in Michigan and that is registered in the state where it has its principal place of business if its only clients in Michigan are federal covered advisers, Michigan-registered advisers, Michigan-registered broker-dealers, institutional investors and bona fide preexisting clients who do not reside in Michigan if the person is registered as an adviser in the states where such clients reside;
- A person that does not have a place of business in Michigan if the person has had, during the preceding 12 months, and in addition to the types of clients described above, not more than 5 clients who are natural persons residing in Michigan; and
- A person that does not hold itself out to the general public as an investment adviser and that has had, during the preceding 12 months, and in addition to the types of clients described above, not more than 5 clients who are natural persons residing in Michigan and who are “accredited investors” as defined in the SEC’s Rule 501 under the Securities Act of 1933.
- The Transition Order requires an investment adviser that amends its Form ADV to submit the amended Form ADV, Parts I and II, together with any amended investment advisory contract, on paper directly to the Administrator of the Act, with all changes highlighted.
- Section 502(3)(b) of the Act authorizes the Administrator, by rule or order, to specify the contents of an investment advisory contract. In the Transition Order, the Commissioner prohibits an investment adviser from entering into or renewing any investment advisory contract unless the contract provides in writing all of the following:
- The services to be provided, the term of the contract, the advisory fee to be paid (including the formula for computing the fee), the amount of any prepaid fee to be returned in the event of termination of the contract and any grant of discretionary power to the adviser;
- A statement that the adviser shall not be compensated on the basis of a share of capital gains or capital appreciation of the client’s funds;
- A statement that no assignment of the contract may be made without the client’s consent; and
- A statement that the adviser, if it is a partnership, shall notify the client within 15 days after any change in the membership of the partnership.
Investment Adviser Representatives:
Section 404 of the Act makes it unlawful for a person to transact business in Michigan as an IAR unless the person is registered as an IAR or exempt from registration. The Act defines an IAR as
“an individual employed by or associated with an investment adviser or federal covered investment adviser and who makes any recommendations or otherwise gives investment advice regarding securities, manages accounts or portfolios of clients, determines which recommendation or advice regarding securities should be given, provides investment advice or holds himself or herself out as providing investment advice, receives compensation to solicit, offer, or negotiate for the sale of or for selling investment advice, or supervises employees who perform any of the foregoing.”
The Transition Order provided a temporary exemption from the IAR registration requirements of the Act and allows a person to transact business in Michigan as an IAR from October 1, 2009, until July 1, 2010, provided that he or she is employed by or associated with an investment adviser properly registered in Michigan (including a federal covered investment adviser who has “notice filed” in Michigan) or with one that is exempt from registration, and provided that he or she successfully completes the registration process before July 1, 2010 (it is unclear what penalties, if any, will be imposed on a person who acts as an IAR during this transition period but fails to complete the registration process).
Section 102a(f) of the Act excludes the following individuals from the definition of an investment adviser representative:
- A person who performs only clerical or ministerial acts for an adviser; and
- A person who is a registered securities agent whose performance of investment advice is solely incidental to the person’s actions as an agent, and the person does not receive special compensation for such advisory services.
Exemption for certain employees of a federal covered investment adviser
However, a person employed by or associated with a federal covered investment adviser (i.e., one registered with the SEC under the Investment Advisers Act of 1940) is excluded from this definition unless the person (a) has a “place of business” in Michigan under the federal definition (SEC Rule 203A-3) and is an “IAR” under the federal definition (SEC Rule 203A-3) or (b) has a “place of business” in Michigan and is not a “supervised person” under the federal definition (Section 202(25) of the Investment Advisers Act of 1940).
Thus, a person employed by a federal covered investment adviser is not an IAR under the Michigan Act and does not have to register as an IAR if:
- The person has no office in Michigan at which he or she regularly provides advisory services, solicits, meets with or communicates with clients and no other location that is held out to the general public as a location at which the person provides these services; or
- The person has 5 or fewer clients who are natural persons or less than 10% of his or her clients are natural persons; or
- The person is not a partner, officer, director or employee of the federal covered investment adviser who provides investment advice on behalf of the adviser and is not subject to supervision and control of the adviser.
Registration of IARs
An investment adviser representative registers by filing a Form U-4 through the CRD/IARD system (www.iard.com), beginning November 1, 2009. Additional information and notices will be sent to investment adviser firms by FINRA before that date. There is an application fee of $65 that must be submitted through the IARD system at the time a person files the U-4 application, and an annual renewal fee of $65. After September 30, 2012, these fees are scheduled to be reduced to $30. In addition, initial applicants for registration as an IAR, must file a consent to service of process (NASAA Form U-2) and take and pass within the two-year period immediately preceding the date of the application either the Uniform Investment Adviser State Law Examination (Series 65) or the Uniform Combined State Law Examination (Series 66) and the General Securities Representative Examination (Series 7).
A person who has been registered as an IAR in another state within the two years preceding the date of his or her application in Michigan is not required to comply with these examination requirements. Also, the examination requirement is waived for any person who is current and in good standing as any of the following:
- Certified Financial Planner (CFP) awarded by the Certified Financial Planners Board of Standards
- Chartered Financial Consultant (ChFC) or Masters of Science and Financial Services (MSFS) awarded by the American College, Bryn Mawr, Pennsylvania
- Chartered Financial Analyst (CFA) awarded by the Institute of Chartered Financial Analysts
- Personal Financial Specialist (PFS) awarded by the American Institute of Certified Public Accountants
- Chartered Investment Counselor (CIC) awarded by the Investment Adviser Association
Registered investment advisers in Michigan should begin now to prepare their IARs for the required examination(s), or confirm their status as one of the accredited professionals listed above. The application process cannot be started until the exam(s) are passed or the professional status can be confirmed to be in good standing.