Chapter DFI-Sec 5

DFI-Sec 5.035(2)(b)1.b. b. The securities are uncertificated, and ownership is recorded only on the records of the issuer or its transfer agent in the name of the client.

DFI-Sec 5.035(2)(b)1.c. c. The securities are transferable only with prior consent of the issuer or holders of the outstanding securities of the issuer.

DFI-Sec 5.035(2)(b)2. 2. The exemptions contained in subd. 1. are available with respect to securities held for the account of a limited partnership, limited liability company, or other type of pooled investment vehicle, only if the entity has audited financial statements that are distributed in compliance with par. (c), and the investment adviser notifies the division on Form ADV that the investment adviser intends to distribute the audited financial statements as prescribed above.

DFI-Sec 5.035(2)(c) (c) An investment adviser is not required to comply with par. (d) with respect to the account of a limited partnership, limited liability company, or another type of pooled investment vehicle that is subject to audit at least annually and distributes annually its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners, members, or other beneficial owners, within 120 days of the end of its fiscal year. The investment adviser shall notify the division on Form ADV that the investment adviser intends to comply with the audit safeguards described above.

DFI-Sec 5.035(2)(d) (d) An investment adviser is not required to comply with sub. (1) with respect to the account of an investment company registered under the investment company act of 1940.

DFI-Sec 5.035(2)(e) (e) An investment adviser is not required to comply with the safekeeping requirements of sub. (1) or the net worth requirements of s. DFI-Sec 5.02 (2) if the investment adviser has custody solely because the investment adviser is the trustee for a beneficial trust, if all of the following conditions are met for each trust:

DFI-Sec 5.035(2)(e)1. 1. The beneficial owner of the trust is a parent, a grandparent, a spouse, a sibling, a child or a grandchild of the adviser. Those relationships shall include “step” relationships.

DFI-Sec 5.035(2)(e)2. 2. For each account under subd. 1., the investment adviser complies with each of the following:

DFI-Sec 5.035(2)(e)2.a. a. The investment adviser provides a written statement to each beneficial owner of the account setting forth a description of the requirements of sub. (1) and the reasons why the investment adviser will not be complying with those requirements.

DFI-Sec 5.035(2)(e)2.b. b. The investment adviser obtains from each beneficial owner a signed and dated statement acknowledging the receipt of the written statement required under subd. 2. a.

DFI-Sec 5.035(2)(e)2.c. c. The investment adviser maintains a copy of the documents required in subd. 2. a. and b. until the account is closed or the investment adviser is no longer trustee.

DFI-Sec 5.035(2)(f) (f) Any adviser who intends to have custody of client funds or securities but is not able to utilize a qualified custodian as defined in sub. (4) (c) shall first obtain approval from the division and shall comply with all of the applicable safekeeping provisions under sub. (1), including taking responsibility for those requirements that are designated to be performed by a qualified custodian.

DFI-Sec 5.035(3) (3) 

DFI-Sec 5.035(3)(a) (a) If an investment adviser receives or obtains a client’s securities or funds inadvertently, but returns them to the client within three business days of receipt, or forwards third party checks within 24 hours of receipt, the adviser will not be considered to have custody, but shall keep the following records relating to the inadvertent custody:

DFI-Sec 5.035(3)(a)1. 1. A ledger or other listing of all securities or funds held or obtained, including the following information:

DFI-Sec 5.035(3)(a)1.a. a. Issuer.

DFI-Sec 5.035(3)(a)1.b. b. Type of security and series.

DFI-Sec 5.035(3)(a)1.c. c. Date of issue.

DFI-Sec 5.035(3)(a)1.d. d. For debt instruments, the denomination, interest rate and maturity date.

DFI-Sec 5.035(3)(a)1.e. e. Certificate number, including alphabetical prefix or suffix.

DFI-Sec 5.035(3)(a)1.f. f. Name in which registered.

DFI-Sec 5.035(3)(a)1.g. g. Date given to the adviser.

DFI-Sec 5.035(3)(a)1.h. h. Date sent to client or sender.

DFI-Sec 5.035(3)(a)1.i. i. Form of delivery to client or sender, or copy of the form of delivery to client or sender.

DFI-Sec 5.035(3)(a)1.j. j. Mail confirmation number, if applicable, or confirmation by client or sender of the fund’s or security’s return.

DFI-Sec 5.035(3)(a)2. 2. If an investment adviser obtains possession of securities that are acquired from an issuer in a transaction or series of transactions not involving any public offering that qualify for the exception from custody under sub. (2) (b), the adviser shall keep the following records:

DFI-Sec 5.035(3)(a)2.a. a. A record showing the issuer or current transfer agent’s name, address, telephone number and other applicable contact information pertaining to the party responsible for recording client interests in the securities; and

DFI-Sec 5.035(3)(a)2.b. b. A copy of any legend, shareholder agreement or other agreement showing that those securities are transferable only with prior consent of the issuer or holders of the outstanding securities of the issuer.

DFI-Sec 5.035(3)(b) (b) Each registered investment adviser whose principal office is in this state who has custody or possession of securities or funds of any client shall maintain and keep current the following books and records in addition to those required under sub. (1):

DFI-Sec 5.035(3)(b)1. 1. A copy of all documents required in sub. (1) (f) if the adviser is authorized or permitted to withdraw a client’s funds or securities maintained with a custodian upon the adviser’s instruction to the custodian.

DFI-Sec 5.035(3)(b)2. 2. A journal or other record showing all purchases, sales, receipts and deliveries of securities, including certificate numbers, for all accounts and all other debits and credits to the accounts.

DFI-Sec 5.035(3)(b)3. 3. 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.

DFI-Sec 5.035(3)(b)4. 4. Copies of confirmations of all transactions effected by or for the account of any client.

DFI-Sec 5.035(3)(b)5. 5. 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.

DFI-Sec 5.035(3)(b)6. 6. A copy of each of the client’s quarterly account statements, as generated and delivered by the qualified custodian. If the adviser also generates a statement that is delivered to the client, the adviser shall also maintain copies of such statements along with the date such statements were sent to the clients.

DFI-Sec 5.035(3)(b)7. 7. If applicable to the adviser’s situation, a copy of the auditor’s report and financial statements and letter verifying the completion of the examination by an independent certified public accountant and describing the nature and extent of the examination.

DFI-Sec 5.035(3)(b)8. 8. A record of any finding by the independent certified public accountant of any material discrepancies found during the examination.

DFI-Sec 5.035(3)(b)9. 9. If applicable, evidence of the client’s designation of an independent representative.

DFI-Sec 5.035(3)(c) (c) If an investment adviser has custody because it advises a pooled investment vehicle, as defined in sub. (4) (a) 3., the adviser shall also keep the following records:

DFI-Sec 5.035(3)(c)1. 1. True, accurate and current account statements;

DFI-Sec 5.035(3)(c)2. 2. If the investment adviser complies with sub. (2) (c), the investment adviser shall make and maintain each of the following records:

DFI-Sec 5.035(3)(c)2.a. a. A record of the date of the audit.

DFI-Sec 5.035(3)(c)2.b. b. A copy of the audited financial statements.

DFI-Sec 5.035(3)(c)2.c. c. A record evidencing the mailing by the issuer of its audited financial statements to all limited partners, members or other beneficial owners within 120 days of the end of its fiscal year.

DFI-Sec 5.035(3)(c)3. 3. If the adviser complies with sub. (1) (g), the investment adviser shall make and maintain the following records:

DFI-Sec 5.035(3)(c)3.a. a. A copy of the written agreement with the independent party reviewing all fees and expenses, indicating the responsibilities of the independent third party.

DFI-Sec 5.035(3)(c)3.b. b. Copies of all invoices and receipts showing approval by the independent party for payment through the qualified custodian.

DFI-Sec 5.035(4) (4) 

DFI-Sec 5.035(4)(a) (a) “Custody” for purposes of this section, means holding directly or indirectly, client funds or securities, or having any authority to obtain possession of them, or having the ability to appropriate them in the following contexts, without limitation:

DFI-Sec 5.035(4)(a)1. 1. Possession of client funds or securities unless received inadvertently and returned to the sender promptly, but in any case within three business days of receiving them, except that receipt of checks drawn by clients and made payable to unrelated third parties will not meet the definition of custody if they are forwarded to the third party within 24 hours of receipt and the adviser maintains the records required under sub. (3) (a);

DFI-Sec 5.035(4)(a)2. 2. Any arrangement, including a general power of attorney, under which an investment adviser is authorized or permitted to withdraw client funds or securities maintained with a custodian upon the investment adviser’s instruction to the custodian; and

DFI-Sec 5.035(4)(a)3. 3. Acting in 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 provides an investment adviser or a supervised person out of the investment adviser, legal ownership of, or access to, client funds or securities.

DFI-Sec 5.035(4)(b) (b) “Independent party” for purposes of sub. (1) (g), means a person that meets all of the following:

DFI-Sec 5.035(4)(b)1. 1. The person is engaged by the investment adviser to act as an intermediary for the payment of fees, expenses and capital withdrawals from a pooled investment.

DFI-Sec 5.035(4)(b)2. 2. The person does not control, is not controlled by, and is not under common control with, the investment adviser.

DFI-Sec 5.035(4)(b)3. 3. The person does not have, and has not had within the past two years, a material business relationship with the investment adviser.

DFI-Sec 5.035(4)(c) (c) “Qualified custodian” for purposes of sub. (1), includes a broker-dealer registered under ch. 551, Stats., or any of the following independent institutions or entities:

DFI-Sec 5.035(4)(c)1. 1. A bank or savings association whose deposits are insured by the federal deposit insurance corporation under the federal deposit insurance act.

DFI-Sec 5.035(4)(c)2. 2. A registered futures commission merchant registered under section 4f(a) of the commodity exchange act, holding the client assets in client 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 or options thereon.

DFI-Sec 5.035(4)(c)3. 3. A foreign financial institution that customarily holds financial assets for its clients, provided that the foreign financial institution keeps the advisory clients’ assets in client accounts segregated from its proprietary assets.

DFI-Sec 5.035(4)(d) (d) “Independent representative” for purposes of this section means a person that satisfies the requirements in each of the following paragraphs:

DFI-Sec 5.035(4)(d)1. 1. The person acts as an agent for an advisory client, and the person by law or contract is obliged to act in the best interests of the advisory client. An advisory client includes, in the case of a pooled investment vehicle, a limited partner of a limited partnership, a member of a limited liability company, or a beneficial owner of another type of pooled investment vehicle.

DFI-Sec 5.035(4)(d)2. 2. The person does not control, is not controlled by, and is not under common control with, the investment adviser.

DFI-Sec 5.035(4)(d)3. 3. The person does not have, and has not had within the past two years, a material business relationship with the investment adviser.

DFI-Sec 5.035 History History: Cr. Register, December, 1999, No. 528, eff. 1-1-00; CR 04-074: renum. (4) (a) from s. DFI-Sec 1.02 (17) and r. and recr. Register December 2004 No. 588, eff. 1-1-05; CR 08-077: am. (1) (intro.), (b) to (f), (2) (b) 1. b., (f), (3) (a) (intro.), 1. h. to j., 2. a., (b), (4) (a), (c) and (d) 1. Register December 2008 No. 636, eff. 1-1-09.

DFI-Sec 5.04 DFI-Sec 5.04 Reporting requirements.

DFI-Sec 5.04(1) (1) Every investment adviser shall file with the division immediate notice via facsimile or other electronic means whenever the net worth of the investment adviser is less than is required under s. DFI-Sec 5.02 (1), specifying the amount of net worth on the date of the notice and the steps the investment adviser has taken or will take to come into compliance.

DFI-Sec 5.04(2) (2) Each investment adviser shall file with the division a copy of any complaint related to its business, transactions, or operations in this state, naming the investment adviser or any of its partners, officers or investment adviser representatives as defendants in any civil or criminal proceeding, or in any administrative or disciplinary proceeding by any public or private regulatory agency, within 20 days of the date the complaint is served on the investment adviser; a copy of any answer or reply to the complaint filed by the investment adviser within 10 days of the date the answer or reply is filed; and a copy of any decision, order or sanction made with respect to any such proceeding within 20 days of the date the decision, order or sanction is rendered.

DFI-Sec 5.04(3) (3) 

DFI-Sec 5.04(3)(a) (a) Except as provided in subs. (2) and (4), each investment adviser shall file with the division any notice of change of control or change of name, as well as any material change in the information included in the investment adviser’s most recent application for registration, in an amendment to Form ADV filed with the division within 30 days of the date of the change.

DFI-Sec 5.04(3)(b) (b) Each investment adviser shall file a complete, updated Form ADV with the investment adviser registration depository within 90 days of the end of its fiscal year.

DFI-Sec 5.04(3)(c) (c) Each investment adviser representative and his or her employing investment adviser or federal covered investment adviser shall update information contained in an investment adviser representative’s application by filing an amendment to Form U-4 with the central registration depository within 30 days of the date of the event that requires filing of the amendment.

DFI-Sec 5.04(4) (4) Each investment adviser shall notify the division in writing within 10 days from the first date the person who is the designated supervisor under s. DFI-Sec 5.05 (7) no longer is acting in that capacity. The notification shall either identify a substituted designated supervisor or undertake to identify to the division in writing a substituted designated supervisor within the 45 day period provided under s. DFI-Sec 5.05 (7).

DFI-Sec 5.04(5) (5) 

DFI-Sec 5.04(5)(a) (a) Each investment adviser shall notify the division in writing within 14 days of either the opening or the change of address in this state of any branch office as defined in s. DFI-Sec 1.02 (7).

DFI-Sec 5.04(5)(b) (b) Each investment adviser shall notify the division in writing at least 14 days after the closing in this state of any branch office as defined in s. DFI-Sec 1.02 (7).

DFI-Sec 5.04(5)(c) (c) The notification provided to the division under par. (a) or (b) shall be made through the investment adviser registration depository for registered investment advisers. Federal covered investment advisers shall provide the notification directly to the division.

DFI-Sec 5.04(5)(d) (d) The notice filed for a branch opening pursuant to par. (a) is deemed filed in accordance with par. (c) upon receipt by the division of the appropriate filing fee and any late filing fee due pursuant to s. DFI-Sec 7.01 (6) (d).

DFI-Sec 5.04(6) (6) Each investment adviser shall file a branch office renewal notice annually under par. (a) or (b), as applicable.

DFI-Sec 5.04(6)(a) (a) Through the investment adviser registration depository for registered investment advisers;

DFI-Sec 5.04(6)(b) (b) Directly with the division for federal covered investment advisers, not later than December 1.

DFI-Sec 5.04 History History: Cr. Register, December, 1977, No. 264, eff. 1-1-78; am. (2) to (4), Register, December, 1980, No. 300, eff. 1-1-81; am. (1) and cr. (1) (b), Register, December, 1982, No. 324, eff. 1-1-83; cr. (5), Register, December, 1989, No. 408, eff. 1-1-90; am. (1) (a), r. and recr. (3), r. (4), renum. (5) to be (4), Register, December, 1990, No. 420, eff. 1-1-91; am. (1) (a), cr. (5) and (6), Register, December, 1991, No. 432, eff. 1-1-91; am. (1) (a), cr. (1) (c), Register, December, 1994, No. 468, eff. 1-1-95; r. and recr. (1), Register, December, 1995, No. 480, eff. 1-1-96; am. (1), cr. (7) and (8), Register, December, 1998, No. 516, eff. 1-1-99; am. (1), Register, December, 1999, No. 528, eff. 1-1-00; CR 01-082: am. (5) (a), Register December 2001 No. 552, eff. 1-1-02; CR 02-102: r. (7) and (8), Register December 2002 No. 564, eff. 1-1-03; CR 08-077: am. (1), (5) (a) and (b), renum. (3) to be (3) (a) and am., (3) (b) and (c) renum. from DFI-Sec 5.01 (2) (d) 2. and 3. and am. (3) (c), r. and recr. (5) (c) and (6) Register December 2008 No. 636, eff. 1-1-09; CR 10-062: cr. (5) (d), am. (6) (b) Register September 2010 No. 657, eff. 10-1-10.

DFI-Sec 5.05 DFI-Sec 5.05 Practice and advisory contract rules.

DFI-Sec 5.05(1) (1) Each investment adviser shall establish written supervisory procedures and a system for applying the procedures, which may reasonably be expected to prevent and detect any violations of ch. 551, Stats., and rules and orders thereunder. The procedures shall include the designation and registration of a number of supervisory employees reasonable in relation to the number of its registered investment adviser representatives, offices and activities in this state.

DFI-Sec 5.05(2) (2) An investment adviser shall not enter, extend, or renew any investment advisory contract if the contract:

DFI-Sec 5.05(2)(a) (a) Provides for compensation to the investment adviser on the basis of a share of capital gains upon, or capital appreciation of, the funds or any portion of the funds of a client other than a person specified in s. 551.403 (2), Stats., or s. DFI-Sec 5.13.

DFI-Sec 5.05(2)(b) (b) Fails to provide, in substance, that no assignment of the contract may be made without the consent of the client; or

DFI-Sec 5.05(2)(c) (c) Fails to provide, in substance, that the investment adviser, if a partnership, shall notify the other party to the contract of any change in the membership of the partnership within a reasonable time after such change.

DFI-Sec 5.05(2)(d) (d) Fails to disclose, in substance, the term of the advisory agreement, the fee to be charged by the adviser, the formula for computing the advisory fee, the formula for computing the amount of prepaid fee to be returned in the event of contract termination or non-performance, and whether the contract grants discretionary power to the adviser.