a q p o d s - ohio department of commerce · 2008. 11. 14. · 2 ohio securities bulletin 98:4...

Ohio Securities Bulletin 98:4 1

Bob TaftGovernor of Ohio

Gary C. SuhadolnikDirector of Commerce

Thomas E. GeyerCommissioner of Securities

A QUARTERLY PUBLICATION OF THE OHIO DIVISION OF SECURITIES

OHIO SECURITIES BULLETIN

COMMERCEDEPARTMENT OF

OHIO

DIVISION OF

SECURITIES

Ohio Securities Bulletin

Issue 98:4

Table of Contents

The Division of Securities is an Equal Opportunity Employer and Service Provider

An Introduction to Am. Sub. H.B. 695 ....... 1

Rule 506 Amendments and Ohio’sModel Accredited Investor Exemption ......... 1

Definitions of "Investment Adviser" and"Investment Adviser Representative" ........... 4

Are You an Investment Adviser UnderOhio Law? ................................................... 6

Are You an Investment AdviserRepresentative Under Ohio Law? ................. 9

IA and IAR Licensing and Notice FilingObligations ................................................ 11

An Examination of the Changes to theAnti-Fraud Standards and CriminalSanctions of Chapter 1707 in the Wakeof Am. Sub. H.B. 695 ................................ 14

New Laws to ImpactEnforcement of Securities Provisions ......... 18

An Introduction to Am. Sub. H.B. 695

Rule 506 Amendments and Ohio’sModel Accredited Investor Exemption

Continued on page 2

Continued on page 3

By Thomas E. Geyer

http://www.securities.state.oh.us

On December 17, 1998, GovernorGeorge V. Voinovich bolstered and up-dated the Ohio Securities Act (the “Act”)by signing Am. Sub. H.B. 695 into law.The primary impact of the bill, sponsoredby Representative Dennis Stapleton, is toestablish state level oversight of certaininvestment advisers and investment ad-viser representatives operating in Ohio.This new oversight will be administeredand enforced by the Ohio Division ofSecurities (the “Division”). In all, 37 sec-tions and subsections of the Act were addedor amended by Am. Sub. H.B. 695. Sub-ject to certain “phase-in” provisions appli-cable to investment advisers and invest-ment adviser representatives, the new statu-tory provisions take effect on March 18,1999.

This issue of the Ohio Securities Bul-letin is devoted to a discussion of the majorissues that spring from Am. Sub. H.B. 695.The following articles address investmentadviser aspects of the bill: “The Defini-tions of ‘Investment Adviser’ and ‘Invest-ment Adviser Representative;’” “IA andIAR Licensing and Notice Filing Obliga-tions;” “The $25,000,000 Question ForOhio Investment Advisers;” and “Phase-InProvisions of Am. Sub. H.B. 695.” Thefollowing articles address non-investmentadviser aspects of the bill: “Rule 506 Amend-ments and Ohio’s Model Accredited In-vestor Exemption;” and “Securities NoticeFilings Under New R.C. 1707.092.” Thearticles entitled “An Examination of the

Am. Sub. H.B. 695 will create a newfiling procedure for Rule 506 offerings inOhio. Separately, the bill adds a newexemption permitting general solicitationsduring offerings limited to accredited in-vestors.

New Companion Exemption forRule 506 Offerings

Prior to the enactment of the Na-tional Securities Markets Improvement Actof 1996 (“NSMIA”) on October 11, 1996,issuers relying on either section 4(2) of theSecurities Act of 1933 (“section 4(2)”) orRule 506 of Regulation D (“Rule 506”)were required to file sales reports withinsixty days of each transaction on theDivision’s Form 3-Q pursuant to R.C.

§1707.03(Q). The Division’s administra-tive rules permitted all sales, within a sixtyday period, to be reported on a single filing.Commissions, discounts and other remu-neration were limited to an aggregate of10% and could be paid only to licensedsecurities dealers.

In response to the uniformity man-date of NSMIA, the Division adopted anadministrative rule in April 1997 permit-ting issuers relying on Rule 506 to fileeither: 1) the Form D, with sales informa-tion for Ohio transactions on the appen-dix, or 2) the Division’s Form 3-Q. AsNSMIA preempted state regulation of of-ferings of “covered securities” except fornotice filing requirements and actions in-volving fraud, the 10% limit on commis-

By Michael P. Miglets

Table of Contents continued on page 2

Ohio Securities Bulletin 98:42

Changes to the Anti-Fraud Standards andCriminal Sanctions of Chapter 1707 in theWake of Am. Sub. H.B. 695” and "NewLaw to Impact Enforcement of SecuritiesProvisions" discuss the new anti-fraud stan-dards applicable to advisers, the increasedcriminal penalties for all violations of theAct and other enforcement aspects. Also,two charts are included: one lists the sec-tions of the Act added or amended by Am.Sub. H.B. 695, and the other lists the Act’slicensing fees. Finally, a letter from LoriRichards of the Office of Compliance,Inspections and Examinations of the Secu-rities and Exchange Commission regard-ing the supervision of “independent con-tractors” is reprinted with the consent ofthe Commission.

Am. Sub. H.B. 695 is landmark leg-islation in the history of the Act and repre-sents the Division’s response to the Na-tional Securities Markets Improvement Actof 1996 (“NSMIA”). The investment ad-viser aspects of the bill are based primarilyon the federal Investment Advisers Act of

Receptionist ...................... 644-7381 Enforcement .............. 466-6140Licensing .......................... 466-3466 Securities Registration 466-3440Records ............................. 466-3001 Webmaster ................ 644-8401

All listings are area code (614)

The Ohio Securities Bulletin is a quarterly publication of the Ohio Department of Commerce,Division of Securities. The primary purpose of the Bulletin is to (i) provide commentary on timely ortimeless issues pertaining to securities law and regulation in Ohio, (ii) provide legislative updates, (iii)report the activities of the enforcement section, (iv) set forth registration and licensing statistics and (v)provide public notice of various proceedings.

The Division encourages members of the securities community to submit for publication articles on timelyor timeless issues pertaining to securities law and regulation in Ohio. If you are interested in submitting anarticle, contact the Editor for editorial guidelines and publication deadlines. The Division reserves the right toedit articles submitted for publication.

Portions of the Ohio Securities Bulletin may be reproduced without permission if properacknowledgement is given.

OHIO SECURITIES BULLETINDesiree T. Shannon, Esq., Editor

Ohio Division of Securities77 South High Street, 22nd Floor • Columbus, Ohio 43215

http://www.securities.state.oh.us

Am. Sub. H.B. 695

Continued from page 1

1940, which governs the operation of allinvestment advisers operating in Ohio priorto March 18, 1999. This should providefor a smooth transition for those adviserswho shift from federal to state oversight.The non-investment adviser portions ofthe bill, for the most part, bring the Act inline with the changes to the state-federalsecurities regulatory framework effected byNSMIA.

Several aspects of Am. Sub. H.B.695 are not covered by separate articles inthis issue of the Bulletin, but nonethelessdeserve mention. First, new R.C. 1707.093permits the Division to, by rule, providefor the electronic filing or submission ofany form, document, material or informa-tion that is required or permitted to be filedwith or submitted to the Division. Backedby this enabling provision, the Divisionexpects to develop an “EDGAR”-type se-curities registration and exemption filingsystem during 1999.

Second, R.C. 1707.20, the Division’srule making authority, has been amendedto allow the Division to consider the inter-ests of “clients or prospective clients.”

Third, the “bringing together” dealerlicensing exception set out in R.C. 1707.431has been amended to exclude investmentadvisers and investment adviser represen-tatives.

Fourth, R.C. 1707.46 has beenamended to extend the authority of theCommissioner of Securities to investmentadvisers and investment adviser represen-tatives.

Finally, R.C. 1707.48 has beenamended to give the Division rule makingauthority regarding certain record reten-tion issues.

Am. Sub. H.B. 695 establishes im-portant consumer protections and alsoserves to preserve and enhance the integrityof the Ohio securities marketplace. TheAct now provides for oversight of thosewho sell advice regarding securities, in ad-dition to those who sell securities. TheDivision is committed to efficient admin-istration and diligent enforcement of theAct in order to promote an honest andvibrant securities market in Ohio.

Mr. Geyer is the Commissioner of Securi-ties.

The $25,000,000 Question for OhioInvestment Advisors ................................... 19

Securities Notice Filings UnderNew R.C. 1707.092 .................................. 20

Phase-In Provisions of Am. Sub.H.B. 695 ................................................... 20

Sections of the Ohio Securities Act Addedor Amended by Am. Sub. H.B. 695 ........... 22

Licensing Fees Under the OhioSecurities Act ............................................. 23

Supervision of Independent Contractors .... 24

Investor Protection andEducation .................................................. 25

Capital Formation Statistics ....................... 26

Registration andLicensing Statistics ..................................... 27

Table of Contents(Continued)


registration of the securities by the Divi-sion. As with Rule 505 offerings, issuers ordealers that have been the subject of sanc-tions for past securities law violations maybe disqualified from relying on the exemp-tion. The Division may waive the dis-qualification upon a showing of good cause.There is no statutory limit on the amountof commissions or other compensationwhich may be paid for sales under thisexemption, but R.C. 1707.14(A)(1) re-quires that any person receiving compen-sation be licensed by the Division. Issuersmay also offer and sell securities directlythrough officers, directors, employees, part-ners, managers and members providedcompensation is not paid for the sale ofsecurities.

Amendments to R.C. §1707.391 inAm. Sub. H.B. 695 will permit “excusableneglect” filings for issuers relying on theexemptions under R.C. §1707.03(X) andR.C. §1707.03(Y). Issuers making an“excusable neglect” filing for an offeringsolely to accredited investors, must file aForm 391 and the Form 3-Y with requiredexhibits. The filing fee will include the$100.00 filing fee under R.C. §1707.03(Y),unless previously submitted, and the$100.00 fee under R.C. §1707.391. Theaffidavits required under Ohio Adminis-trative Code 1301:6-3-391(D) also mustbe filed. For sales under the accreditedinvestor exemption, “excusable neglect”will be presumed if the Form 391/Form 3-Y filing is made within six months of theearliest sale. For Rule 506 offerings, onlythe Form D, the consent to service, ifrequired under R.C. §1707.11, the$100.00 filing fee and the $100.00 feeunder R.C. §1707.391 must be filed tomake a corrective filing. There is no timelimit set forth in the Division's Adminis-trative Rules defining “excusable neglect”for Rule 506 offerings, but NSMIA indi-cates that delays in the payments of fees orthe underpayment of fees should bepromptly submitted.

Mr. Miglets serves as the Division’s ControlBid Attorney and also reviews registrationand exemption filings.

sions, discounts and other remunerationno longer applied to offerings under Rule506. Filing procedures and the dealercompensation limit of 10% were notchanged for offerings under section 4(2)of the Securities Act of 1933, as NSMIAdid not include offerings under section4(2) as a “covered security.” As R.C.§1707.03(Q) set forth statutory require-ments for the filing requirements and feesfor sales reports in Ohio, the Division wasnot authorized to amend the timing offilings or the required fees for Rule 506offerings by administrative rule.

Am. Sub. H.B. 695 will make thefiling requirements in Ohio for issuersrelying on Rule 506 consistent with thetiming of filings under Regulation D. Thereference to rules enacted under section4(2) in R.C. §1707.03(Q) will be deleted.The exemption under R.C. §1707.03(Q)will be available only to issuers relying onsection 4(2). The sixty-day post-sale filingrequirement, the 10% limit on dealer com-pensation and the Division’s administra-tive rules will all remain unchanged underAm. Sub. H.B. 695. Issuers relying onsection 4(2) must continue to file salesreports on the Division’s Form 3-Q.

A new notice filing provision forofferings exempt under Rule 506 will beadded in R.C. §1707.03(X). This provi-sion will require issuers relying on Rule506 to file a Form D within fifteen days ofthe first sale with a consent to service, ifrequired under R.C. §1707.11, and a$100.00 filing fee. While the time tosubmit filings has been reduced to fifteendays from sixty days after the first sale,additional sales reports will no longer berequired for offerings under Rule 506.Once the $100.00 filing fee is received,issuers will be permitted to file amend-ments to the Form D without additionalfees. There is no limit on commission,discounts, or other remuneration paid inconnection with offerings under Rule 506,but persons receiving compensation mustbe licensed with the Division under R.C.

Rule 506 AmendmentsContinued from page 1

§1707.14 or the sale must qualify as a deminimus transaction by an associated per-son under section 15 of the Securities Ex-change Act of 1934. Issuers will still be ableto make sales in Ohio through officers,directors, partners, managers, members andtrustees under R.C. §§1707.01(E)(1)(a)and 1707.14 provided that no commis-sions or other compensation are paid forsales.

Model Accredited InvestorExemption

A new exemption for sales to accred-ited investors as defined under Rule 501 ofRegulation D will be added under Am.Sub. H.B. 695. Unlike Rules 505 and 506of Regulation D, the exemption underR.C. §1707.03(Y) will permit general so-licitations after a filing with the Division.The exemption is similar to Section25102(M) of the California CorporationCode and the NASAA Model AccreditedInvestor Exemption. There is no dollarlimitation set on the size of the offeringunder R.C. §1707.03(Y), but Rule 504 ofRegulation D or Rule 1001 of the Securi-ties and Exchange Commission may im-pose a $1,000,000.00 or $5,000,000.00limit on the size of the offering. Thegeneral solicitations permitted under thisexemption may allow issuers to use ACE-NET or other Internet connections forsales in Ohio.

To qualify for the exemption, anissuer must make a pre-sale filing on theDivision’s Form 3-Y with a consent toservice, if required under R.C. §1707.11,and pay a $100.00 filing fee. Copies of alloffering materials and notices must be sub-mitted with the Form 3-Y. All offeringmaterials must clearly indicate that theoffering is limited solely to accredited in-vestors. Telephone solicitations are per-mitted, but the issuer or dealer must havea reasonable belief that the prospectiveinvestor is an accredited investor. Securi-ties sold pursuant to this exemption will berestricted securities, and may be resoldonly to other accredited investors or after


The starting points for the adviseranalysis are the definitions of “invest-ment adviser” and “investment adviserrepresentative.” The definitions of theseterms under Ohio law are virtually iden-tical to the definitions of the terms underfederal law.

Definition of“Investment Adviser”

The definition of “investment ad-viser” is contained in R.C. 1707.01(X),as amended by Am. Sub. H.B. 695, whichstates:

(X)(1) “Investment adviser”means any person who, for com-pensation, engages in the busi-ness of advising others, either di-rectly or through publications orwritings, as to the value of securi-ties or as to the advisability ofinvesting in, purchasing, or sell-ing securities, or who, for com-pensation and as a part of regularbusiness, issues or promulgatesanalyses or reports concerning se-curities.

(2) “Investment adviser” doesnot mean any of the following:

(a) Any attorney, accountant,engineer, or teacher, whose per-formance or investment advisoryservices described in division(X)(1) of this section is solely in-cidental to the practice of theattorney’s , accountant’s ,engineer’s, or teacher’s profession;

(b) A publisher of any bonafide newspaper, news magazine,or business or financial publica-tion of general and regular circu-lation;

(c) a person who acts solely asan investment adviser representa-tive;

(d) a bank holding company,as defined in the “Bank HoldingCompany Act of 1956,” 70 Stat.133, 12 U.S.C. 1841, that is notan investment company;

(e) a bank, or any receiver,conservator, or other liquidatingagent of a bank;

(f) any licensed dealer or li-censed salesperson whose perfor-mance of investment advisory ser-vices described in division (X)(1)of this section is solely incidentalto the conduct of the dealer’s orsalesperson’s business as a licenseddealer or licensed salesperson andwho receives no special compen-sation for the services;

(g) any person, the advice,analyses, or reports of which donot relate to securities other thansecurities that are direct obliga-tions of, or obligations guaran-teed as to principal or interest by,the United States, or securities

issued or guaranteed by corpora-tions in which the United Stateshas a direct or indirect interest,and that have been designated bythe secretary of the treasury asexempt securities as defined inthe “Securities Exchange Act of1934,” 48 Stat. 881,15 U.S.C 78c;

(h) any person that is excludedfrom the definition of investmentadviser pursuant to section202(a)(11)(A) to (E) of the “In-vestment Advisers Act of 1940,”15 U.S.C. 80b-2(a)(11), or thathas received an order from thesecurities and exchange commis-sion under section 202(a)(11)(F)of the Investment Adviser Act of1940,” 15 U.S.C. 80b-2(a)(11)(F), declaring that theperson is not within the intent ofsection 202(a)(11) of the Invest-ment Advisers Act of 1940.

(i) any other person that thedivision designates by rule, if thedivision finds that the designa-tion is necessary or appropriate inthe public interest or for the pro-tection of investors or clients andconsistent with the purposes fairlyintended by the policy and provi-sions of this chapter.

Use the flow chart on pages 6 and7 (and accompanying notes) to walkthrough the elements of this definition.

Definitions of “Investment Adviser" and “Investment Adviser Representative”By Thomas E. Geyer


Definition of “Investment AdviserRepresentative”

The definition of “investment ad-viser representative” is contained in newR.C. 1707.01(II), which states:

(II)(1) “Investment adviser rep-resentative” means a supervisedperson of an investment adviser,provided that the supervised per-son has more than five clientswho are natural persons otherthan excepted persons defined indivision (KK) of this section, andthat more than ten per cent of thesupervised person’s clients arenatural persons other than ex-cepted persons defined in divi-sion (KK) of this section. “In-vestment adviser representative”does not mean any of the follow-ing:

(a) a supervised person thatdoes not on a regular basis solicit,meet with, or otherwise commu-nicate with clients of the invest-ment adviser;

(b) a supervised person thatprovides only investment advi-

sory services described in division(X)(1) of this section by means ofwritten materials or oral state-ments that do not purport to meetthe objectives or needs of specificindividuals or accounts;

(c) any other person that thedivision designates by rule, if thedivision finds that the designa-tion is necessary or appropriate inthe public interest or for the pro-tection of investors or clients andis consistent with the provisionsfairly intended by the policy andprovisions of this chapter.

(2) For the purpose of thecalculation of clients in division(II)(1) of this section, a naturalperson and the following personsare deemed a single client: anyminor child of the natural person;any relative, spouse, or relative ofthe spouse of the natural personwho has the same principal resi-dence as the natural person; allaccounts of which the natural per-son or the persons referred to indivision (II)(2) of this section arethe only primary beneficiaries; andall trusts of which the natural per-

son or persons referred to in divi-sion (II)(2) of this section are theonly primary beneficiaries. Per-sons who are not residents of theUnited States need not be in-cluded in the calculation of cli-ents under division (II)(1) of thissection.

(3) If subsequent to the effec-tive date of this amendment,amendments are enacted oradopted defining “investment ad-viser representative” for purposesof the Investment Advisers Act of1940 or additional rules or regu-lations are promulgated by theSecurities and Exchange Commis-sion regarding the definition of“investment adviser representa-tive” for purposes of the Invest-ment Advisers Act of 1940, thedivision of securities shall, by rule,adopt the substance of the amend-ments, rules, or regulations, un-less the division finds that theamendments, rules, or regulationsare not necessary for the protec-tion of investors or in the publicinterest.

Use the flow chart on page 9 (andaccompanying notes) to walk throughthe elements of this definition.


For “compensation”1 and “as apart of regular business,”2 do youissue or promulgate analyses orreports3 concerning “securities”?

Do you provide services for“compensation”1?

Are you “engaged in the business”2

of advising others, either directly orthrough publications or writings?

Is your advice3 as to the value of “secu-rities” or as to advisability of investingin, purchasing or selling “securities”?

Are you an attorney, accountant, engineer or teacherwhose performance of investment advisory services is“solely incidental”4 to the practice of the profession?

Are you the publisher of any bona fide newspaper,news magazine or business or financial publication

of general and regular circulation5?

Yes

Yes

Yes

No

Yes

Are you a person who acts solely as aninvestment adviser representative6?

No

No

No No

No

No

Yes

Yes

Yes

ARE YOU AN INVESTMENT ADVISER UNDER OHIO LAW?(R.C. 1707.01(X))

(The accompanying notes are an integral part of this flowchart.)


Are you a bank holding company as defined inthe federal Bank Holding Company Act?

Are you a “bank”7, or any receiver, conservatoror other liquidating agent of a bank?

No

Yes

Yes

Are you a securities dealer or salesperson licensedby the Division whose performance of investment

advisory services is “solely incidental”4 to theconduct of your business as a licensed dealer orsalesperson, and who does not receive “special

compensation”8 for the advisory services?

No

Does your advice, analyses or reports relate onlyto securities that are direct obligations of, or

obligations guaranteed by, the U.S., or by certainU.S. sponsored corporations,9 designated by the

Secretary of the Treasury?

Are you excluded from the federal definition ofinvestment adviser pursuant to §§ 202(a)(11)(A) to

(E) of the Investment Advisers Act of 1940?

Have you received an order from the SEC pursuant to§ 202(a)(11)(F) of the Investment Advisers Act of 1940?

No

No

No

YOU ARE AN IN-VESTMENT AD-VISER UNDER

OHIO LAW.

YOU ARE NOT ANINVESTMENT

ADVISER UNDEROHIO LAW.

No

Yes

Yes

Yes

Yes


NOTES TO “ARE YOU AN INVESTMENT ADVISER UNDER OHIO LAW?”

1. “Compensation” is construed broadly and means the receipt of any economic benefit, whether in the form of an advisory fee or someother fee relating to the total services rendered, commissions, or some combination of the foregoing. It is not necessary that an adviser’scompensation be paid directly by the person receiving investment advisory services, but only that the investment adviser receivecompensation from some source for the services. See SEC Release No. IA-1092, § II.A.3. (October 8, 1987).

2. “As a part of regular business” and “engages in the business” both require a “business” element and are to be construed in the samemanner. The determination to be made is whether the degree of the person’s advisory activities constitutes being “in the business.”Whether a person giving advice about securities for compensation would be “in the business” depends upon all relevant facts andcircumstances. In general, a person is considered to be “in the business” if the person (i) holds himself or herself out as an investmentadviser or as one who provides investment advice; or (ii) receives any separate or additional compensation that represents a clearlydefinable charge for providing advice about securities; or (iii) on anything other than rare, isolated and non-periodic instances, providesspecific investment advice. See SEC Release No. IA-1092, § II.A.2. (October 8, 1987).

3. The advice, report or analyses need not be with respect to particular securities. Rather, for example, advice concerning the relativeadvantages and disadvantages of investing in securities in general as compared to other investments would be “advice” for purposesof this prong of the definition. See SEC Release No. IA-1092, § II.A.1. (October 8, 1987).

4. Whether an exclusion from the definition of investment adviser is applicable depends on the relevant facts and circumstances. Forexample, an attorney or accountant who holds himself or herself out to the public as providing financial planning or advisory serviceswould not appear to fall within this “solely incidental” exclusion. See SEC Release No. IA-1092, § II.B. (October 8, 1987). In general,three factors are relevant to the determination of whether the “solely incidental” exclusion is available: (i) whether the person holdshimself or herself out to the public as an investment adviser, financial planner or other provider of advisory services; (ii) whether theadvisory services are rendered in connection with and reasonably related to the professional services; (iii) whether the fee charged foradvisory services is based on the same factors as those used to determine the fee for the professional services. See, e.g., Hauk, Soule& Fasani, P.C., SEC No-Action Letter (April 2, 1986); Milton O. Brown, P.C., SEC No-Action Letter (August 28, 1983).

5. This exclusion does not include bulletins that are issued from time to time in response to episodic market activity, advertisements that“tout” particular issues, advertised lists of stocks “that are sure to go up” that are sold to individual purchasers or publications distributedas an incident to personalized investment service. Lowe v. SEC 472 U.S. 181 (1985). The Lowe court did hold that this exclusionwas applicable to a newsletter that was “completely disinterested” and “offered to the general public on a regular schedule.” Id. at 206.The definition of “investment adviser” encompasses publishers as well as authors. See SEC Release No. IA-563 (January 10, 1977).This exclusion, if it is available, would extend to authors.

6. A person may act as both an investment adviser and an investment adviser representative. See R.C. 1707.161(B)(2). However, a personwho acts solely as an investment adviser representative is excluded from the definition of investment adviser. “Investment adviserrepresentative” is defined in R.C. 1707.01(II).

7. “Bank” is defined in R.C. 1707.01(O). This exclusion extends to an employee of a bank to the extent that the employee is acting inhis or her capacity as an employee. See, e.g., Harbor Springs State Bank, SEC No-Action Letter (March 3, 1986). This exclusion doesnot extend to a bank employee acting in his or her individual capacity. Id.

8. “Special compensation” for investment advice is compensation to the dealer or salesperson in excess of that which he or she would bepaid for providing a brokerage or dealer service alone. Consequently, “special compensation” exists where there is a clearly definablecharge for investment advice. See SEC Release No. IA-626, § V. (April 27, 1978).

9. For example, the Government National Mortgage Association (“GNMA”).


Are you a “supervisedperson”1?

Do you have more than 5 “clients”2

who are natural persons other than“excepted persons”3?

Are more than 10% of your “clients”2

natural persons other than “exceptedpersons”3?

Do you on a regular basis solicit, meet with, orotherwise communicate with clients of the

investment adviser?

Do you provide only investment advisory servicesby means of written materials or oral statements

that do not purport to meet the objectives or needsof specific individuals of accounts4?

Yes

Yes

Yes

No

YOU ARE AN INVESTMENTADVISER REPRESENTATIVE

UNDER OHIO LAW

No

No

No

No

Yes

Yes

ARE YOU AN INVESTMENT ADVISER REPRESENTATIVE UNDER OHIO LAW?(R.C. 1707.01(II)

(The accompanying notes are an integral part of this flowchart.)

YOU ARE NOT AN INVEST-MENT ADVISER REPRESEN-TATIVE UNDER OHIO LAW

Yes


NOTES TO “ARE YOU AN INVESTMENT ADVISER REPRESENTATIVE UNDER OHIO LAW”?

1. “Supervised person” is defined in R.C. 1707.01(JJ) to mean a natural person who is any of the following:

(1) a partner, officer, or director of an investment adviser, or other person occupying a similar status orperforming similar functions with respect to an investment adviser; or

(2) an employee of an investment adviser; or

(3) a person who provides investment advisory services on behalf of the investment adviser and issubject to the supervision and control of the investment adviser.

This definition of “supervised person” matches the federal definition of “supervised person” contained in section202(a)(25) of the Investment Adviser Act of 1940. The definition of “investment adviser representative” containedin R.C. 1707.01(II) tracks the definition of that term set out in SEC Rule 203A-3(a) promulgated under theInvestment Advisers Act of 1940.

2. R.C. 1707.01(II)(2) lists certain persons who are deemed to be a single client for purposes of this definition. R.C.1707.01(II)(2) tracks SEC Rule 203(b)(3)-1 promulgated under the Investment Advisers Act of 1940.

3. “Excepted person” is defined in R.C. 1707.01(KK), and generally means a person who has: (i) at least $750,000under the management of the adviser; or (ii) has a net worth (jointly with spouse) of more than $1,500,000; or (iii)is a “qualified purchaser” as defined in R.C. 1707.01(LL); or (iv) is an executive officer, director, trustee, generalpartner, or person serving in a similar capacity of the investment adviser; or (v) is a non-clerical employee of theinvestment adviser who participates in the investment activities of the adviser, and has so participated for at least12 months. This definition of “excepted person” tracks the SEC’s definition of “excepted person” contained in SECRule 203A-3(a)(3)(i) promulgated under the Investment Advisers Act of 1940, which in turn is based on SEC Rule205-3(d)(1) promulgated under the Investment Advisers Act of 1940.

“Qualified purchaser” is defined in R.C. 1707.01(LL), and generally means a natural person who owns not lessthan $5,000,000 in “investments” or who owns and invests on a discretionary basis not less than $25,000,000 in“investments.” This definition of “qualified purchaser” is based on the SEC’s definition of “qualified purchaser”set out in SEC Rule 205-3(d)(1)(ii)(B) promulgated under the Investment Advisers Act of 1940. For purposes ofthis definition of “qualified purchaser,” the Division defines “investments” to mean “investments” as defined insection 2(a)(51)(A) of the Investment Company Act of 1940.

4. This is defined as “impersonal investment advice” by the SEC. See SEC Rule 203A-3(a)(3)(ii) promulgated underthe Investment Advisers Act of 1940.


By Deborah Dye Joyce

As you have been reading through-out this issue of the Ohio Securities Bulletin,Am. Sub. H.B. 695, signed by GovernorVoinovich on December 17, 1998 andeffective as of March 18, 1999, gives theOhio Division of Securities (Division) over-sight of certain Investment Advisers (“IAs”)and Investment Adviser Representatives(“IARs”) in Ohio. This article will addresswhen a person may act as an InvestmentAdviser or Investment Adviser Representa-tive in Ohio, as well as types of filings thatmust be submitted to the Division.

It is important to note that the In-vestment Adviser and Investment AdviserRepresentative licensing provisions of Am.Sub. H.B. 695, sections 1707.141,1707.151, and 1707.161, parallel the pro-visions of existing Revised Code sections1707.14, 1707.15, and 1707.16 regardinglicensing of securities dealers and salesper-sons. Similarities exist throughout the newlicensing provisions, such as periods ofeffectiveness, renewal procedures and the“good business repute” standard. Also, theDivision has developed companion ad-ministrative rules for implementing thestatutory provisions of Am. Sub. H.B. 695.

In reading the following, keep inmind that three categories of filings will bediscussed: (1) Investment Adviser NoticeFilings; (2) Investment Adviser LicenseApplications; and (3) Investment AdviserRepresentative License Applications.

The section of the National Securi-ties Markets Improvement Act of 1996(NSMIA) entitled the “Investment Ad-viser Supervision Coordination Act,” be-came effective July 8, 1997, and generallyreallocated regulatory oversight of Invest-ment Advisers with “assets under manage-ment” of greater than $25 million to theSEC and those Investment Advisers with“assets under management” of less than$25 million to the states. States are there-fore preempted from regulating those In-vestment Advisers that are registered pur-suant to Section 203 of the InvestmentAdvisers Act of 1940 (’40 Act) and thosepersons excepted from the federal defini-tion of “Investment Adviser.”

Who can act as an Investment Ad-viser in Ohio? New section 1707.141contains the controlling provisions of whomay act as an Investment Adviser in Ohio,and parallels existing Revised Code section1707.14, the controlling provision regard-ing who may act as a securities dealer inOhio. Section 1707.141(A) provides thatno person shall act as an Investment Ad-viser in Ohio unless the person is: (1)licensed by the Division; (2) registeredwith the SEC and makes a notice filingwith the Division; or (3) fits in one or bothof the two exceptions from InvestmentAdviser licensure.

The licensing exceptions apply wherethe person has no “place of business” inOhio and has only certain specified institu-tional clients, or has no “place of business”in Ohio and has only a de minimus num-ber of clients during the preceding twelvemonths. These licensing exceptions areself-executing, meaning that the person isnot required to make a filing with theDivision. See section 1707.141(A).

Under section 1707.141(A)(2), anInvestment Adviser registered pursuant toSection 203 of the ’40 Act and who makesa notice filing in Ohio may act as anInvestment Adviser in Ohio —but whatare the standards for federal registrationand what constitutes a notice filing?

Generally, in order to be registeredwith the SEC, the person must meet one—or more—of the following ten provisions.(These ten provisions regarding SEC regis-tration eligibility comprise the Schedule Ito the Form ADV):

• The person has “assets undermanagement” of $25 million ormore. (Originally, the threshold inthe NSMIA was $25 million ormore. The threshold was increasedin Rule 203A-1(a) under the ’40Act to $30 million or more. Re-view, as well, the safe harbor provi-sions of Rule 203A-1(b) under the’40 Act which, together with Rule203A-1(a), make registration withthe SEC optional for InvestmentAdvisers having “assets under man-agement” between $25 million and$30 million.) See “The $25 Mil-

lion Question for Ohio InvestmentAdvisers" elsewhere in this issue ofthe Bulletin.

• The person has its principal of-fice and place of business in Wyo-ming, the remaining state not cur-rently regulating Investment Ad-visers. Two other states, Coloradoand Iowa, did not have regulatoryoversight of Investment Advisersand Investment Adviser Represen-tatives at the time the NSMIA waspassed, but began regulating In-vestment Advisers and InvestmentAdviser Representatives on Janu-ary 1, 1999;

• The person has its principal of-fice and place of business outsidethe United States;

• The person is an InvestmentAdviser to a registered investmentcompany, a business inherently na-tional in nature;

• The person is a nationally rec-ognized statistical rating organiza-tion (NRSRO.) The Division un-derstands that a determination ofwhat constitutes a NRSRO is madeby the SEC’s Division of MarketRegulation via no-action letters;

• The person is a pension consult-ant qualifying for the exemption inRule 203A-2(b) under the ’40 Act;

• The person is an InvestmentAdviser that controls, is controlledby, or is under common controlwith, an Investment Adviser eli-gible to maintain its SEC registra-tion, and whose principal officeand place of business are the sameas the eligible Investment Adviser.See Rule 203A-2(c) under the ’40Act;

• The person is a newly formedInvestment Adviser relying on Rule203A-2(d) under the ’40 Act. Gen-erally, the person may register withthe SEC if it reasonably believesthat within 120 days of registering,it would otherwise be eligible to

IA and IAR Licensing and Notice Filing Obligations

Continued on page 12


register with the SEC. The personmust undertake to withdraw its SECregistration, if, after the 120th day,the person would be prohibited byRule 203A(a) from registering withthe SEC;

• The person has received an SECorder permitting SEC registrationbecause it would be an unfair bur-den on interstate commerce or oth-erwise inconsistent with the pur-poses intended by the ’40 Act;

• The person is a multi-state In-vestment Adviser relying on Rule203A(e) under the ’40 Act. Gener-ally, the person would be requiredby the laws of thirty or more statesto register as an Investment Ad-viser.

Despite the NSMIA’s preemptionprovisions with regard to the states regis-tering, licensing or qualifying federally reg-istered Investment Advisers, the NSMIAspecifically preserved the states’ rights toreceive from federally registered Invest-ment Advisers, documents filed with theSEC, filing fees, and consents to service ofprocess. This preservation of states’ rights,in general, constitutes the notice filingprescribed by section 1707.141(B).

More specifically, Ohio Administra-tive Code (OAC) 1301:6-3-141(A) pro-vides that a notice filing is comprised of aForm ADV, a filing fee of $100, docu-ments filed with the SEC, and a consent toservice of process. The Form ADV is usedas both a registration document with theSEC and states, and may be used, in part,as a disclosure document to clients. TheForm ADV contains nine schedules, not allof which may need to be filed by theperson. Some of the more frequently usedschedules include Schedule G, a balancesheet, Schedule H which may be used bysponsors of wrap fee programs to fulfilldisclosure requirements, and Schedule Iwhich pertains to SEC registration eligibil-ity. Part II of the Form ADV may be usedto satisfy the requirements of the “Bro-chure Rule,” noted later in this article.

The Form ADV is a common thread,as you will see, for both notice filings andInvestment Adviser License Applications.

Likewise, the other components of thenotice filing, the fee, consent to service ofprocess and other documents filed with theSEC are also components of InvestmentAdviser License Applications. Unlike In-vestment Adviser License Applications, anotice filing is not a “request” to the Divi-sion. It is merely a notice to the Divisionthat the federally registered InvestmentAdviser is operating in Ohio.

Notice filings are effective for thecalendar year, thus expiring on December31st, unless renewed. Renewal filingsshould therefore be submitted to the Divi-sion prior to expiration. The Divisionmay, however, accept notice filings throughJanuary 10th, backdating effectiveness toJanuary 1st. Filings received during thefirst ten days in January will incur an extrafee of $50 in addition to the regular $100filing fee. See section 1707.17(A)(3) ofAm. Sub. H.B. 695 and OAC 1301:6-3-141(F).

Am. Sub. H.B. 695 contains impor-tant “phase-in” provisions with regard notonly to notice filings, but with regard toInvestment Adviser and Investment Ad-viser Representative License Applicationsas well. Specifically, those persons subjectto the requirements of sections 1707.141,1707.151, and 1707.161 have until De-cember 31, 1999 to comply.

Consequently, if persons subject tosections 1707.141, 1707.151, and1707.161 submit the applicable filing andfee to the Division prior to October 1,1999, the initial effective period will notonly be through the remainder of 1999,but through December 31, 2000. Withoutthe “phase-in,” persons subject to compli-ance with Sections 1707.141, 1707.151,and 1707.161 would have to immediatelycomply. Note however, with regard toInvestment Adviser License Applicants inOhio, the “phase-in” provisions only per-tain to those Investment Advisers currentlyregistered as an investment adviser with theSEC. (See “Phase-In Provisions of Am.Sub. H.B. 695” elsewhere in this issue ofthe Bulletin.)

Pursuant to section 1707.141(A)(1),a person not a federally registered Invest-ment Adviser, not able to place its relianceon one of the two licensing exceptions, butdesiring to act as an Investment Adviser inOhio, must apply for licensure. Section1707.151 of Am. Sub. H.B. 695 provides

that an Investment Adviser License Appli-cation shall consist of not only the FormADV, filing fee, consent to service of pro-cess and other documents filed with theSEC (the notice filing components), butadditional information as well.

Specifically, the applicant for Invest-ment Adviser licensure must also submitinformation notifying the Division of its“designated principal” (Form ADV-OH/DP) and the identity of the InvestmentAdviser Representatives employed by, orassociated with, the applicant (ADV-OH/IAR.) (Keep in mind that an InvestmentAdviser may only employ Investment Ad-viser Representatives duly licensed or ex-cepted from licensure in Ohio. See section1707.151(F).)

Since an Investment Adviser may bea natural person or an entity, an entityapplying for licensure must designate anatural person to meet the minimum com-petency standard. The natural person In-vestment Adviser or Designated Principalmust also submit a fingerprint card to theDivision, if one is not already on file withthe NASD or CRD.

Just as with existing licensing provi-sions for securities dealers, the natural per-son Investment Adviser or Designated Prin-cipal of an Investment Adviser must sub-mit evidence that a minimum competencystandard has been met. The minimumcompetency standard for advisers may bemet in one of three ways.

First, the minimum competencystandard may be met if the natural personsubmits evidence that he or she has passedone or more of eleven specified NASDexaminations set forth in OAC 1301:6-3-151(B). The specified NASD examina-tions are the Series 6, 7, 8, 22, 24, 26, 39,62, 63, 65, or 66.

Second, the minimum competencystandard may be met if the natural personsubmits evidence that he or she has achievedone or more of five specified professionaldesignations: the Certified Financial Plan-ner (CFP), Chartered Financial Analyst(CFA), Chartered Financial Consultant(CFC), Chartered Investment Counselor(CIC), or Certified Public Accountant/Personal Financial Specialist (CPA/PFS).

Lastly, the minimum competencystandard may be met if the natural personhas been continuously registered as an in-

IA and IAR LicensingContinued from page 11


vestment adviser with the SEC on or beforeMarch 18, 1996.

Again, as with existing licensing pro-visions for securities dealers and salesper-sons, the Division is required by statute tomake a determination of the “good busi-ness repute” of the applicant. In makingthis determination, the Division will con-sider the eleven factors enumerated in OAC1301:6-3-19(D) such as the nature of actsand practices of the applicant, the existenceof sanctions against the applicant, andwhether the applicant has engaged in anyconduct which would reflect on theapplicant’s reputation for honesty, integ-rity and competence.

As with notice filings, InvestmentAdviser licenses are effective for the calen-dar year and should be renewed prior toexpiration. Likewise, renewal applicationsmay be accepted by the Division throughJanuary 10th with an extra fee of half theregular filing fee. Unlike notice filings, theDivision will send renewal license applica-tion packets to Investment Adviser licens-ees containing, among other items, a Re-newal Questionnaire. See OAC 1301:6-3-151(F)(1).

It should be remembered that the“phase-in” provisions of Am. Sub. H.B.695 apply not only to notice filers but tolicensee applications as well. It is impor-tant to recall however, that only thoseInvestment Advisers currently registered asan investment adviser with the SEC havethe “phase-in” provisions available to them.Therefore,if you are not registered with theSEC as an investment adviser as of March18, 1999, and on that date the provisionsof section 1707.141 are applicable to you,you should immediately file an applicationfor licensure with the Division or be able torely on one or more of the specified excep-tions to licensure. The Division will beginaccepting license applications on February15, 1999.

Investment Advisers often hold mul-tiple licenses. Consequently, Am. Sub.H.B. 695 permits licensure as both anInvestment Adviser and a securities dealeror salesperson. See section 1707.141(A)(1).Am. Sub. H.B. 695 also permits one to belicensed as an Investment Adviser and anInvestment Adviser Representative in Ohio.See section 1707.161(B)(2).

An Investment Adviser license maybe transferred to a successor entity that is

substantially similar to the original Invest-ment Adviser licensee upon submission tothe Division of an application for transferand appropriate filing fee. See section1707.18(A).

OAC 1301:6-3-151 not only con-tains provisions regarding Investment Ad-viser licensing requirements, but containsprovisions regarding certain responsibili-ties of a licensed Investment Adviser inOhio. For the most part, these provisionsparallel existing federal provisions and in-clude books and records requirements (SeeOAC 1301:6-3-151(C) and Rule 204-2under the ’40 Act); record keeping andDivision examinations (See OAC 1301:6-3-151(C)(5) and proposed OAC 1301:6-3-151(D)); prevention or misuse ofnonpublic information (See OAC 1301:6-3-151(G)); the “Brochure Rule” (See OAC1301:6-3-151(H), Part II of the FormADV, and Rule 204-3 under the ’40 Act);and investment advisory contracts (SeeOAC 1301:6-3-151(I) and Rules202(a)(1)-1, 205-1, 205-2, and 205-3 un-der the ’40 Act.) Though important as-pects of Investment Adviser responsibili-ties, these provisions do not affect theapplication process itself beyond, possibly,the Division’s determination of good busi-ness repute and so, will not be discussed infurther detail at this time.

Thus far, this article has discussedtwo types of filings with the Division:notice filings made by federally registeredInvestment Advisers and applications forlicensure in Ohio as Investment Advisers.The third type of filing created by Am.Sub. H.B. 695 is an application for licen-sure as an Investment Adviser Representa-tive.

Section 1707.161 of Am. Sub. H.B.695 contains the controlling provisions ofwho may act as an Investment AdviserRepresentative in Ohio. Likewise, section1707.161 parallels existing provisions insection 1707.16 of the Revised Code re-garding securities salesperson licensure.Specifically, section 1707.161 provides thatno person shall act as an Investment Ad-viser Representative in Ohio unless theperson is licensed in Ohio or fits in one ormore of four exceptions from licensure.

The first exception to InvestmentAdviser Representative licensure providesthat if a natural person licensed as an In-

vestment Adviser by the Division does notalso act as an Investment Adviser Repre-sentative for another Investment Adviser,then licensure as an Investment AdviserRepresentative is not necessary. (If, on theother hand, the natural person InvestmentAdviser acts as an Investment Adviser Rep-resentative for another Investment Adviser,then the natural person Investment Ad-viser must be licensed (or able to rely on alicensing exception) as an Investment Ad-viser Representative as well.)

The second exception from the li-censing provisions of section 1707.161 iswhen the person has no “place of business”in Ohio and is employed by or associatedwith a federally registered Investment Ad-viser.

The third and fourth exceptions fromthe Investment Adviser Representative li-censing provisions of section 1707.161 arewhen the person is employed by or associ-ated with an Investment Adviser who hasno “place of business” in Ohio and eitherthe Investment Adviser’s only clients inOhio are certain institutional clients or areonly a de minimus number of clients (Re-call the prior discussion for section1707.141 regarding the exceptions fromInvestment Adviser licensing.)

Each of the four exceptions from theInvestment Adviser Representative licens-ing provisions is self-executing—no filingwith the Division is necessary.

If an exception from the InvestmentAdviser Representative licensing provisionsis not available, the person must apply forlicensure. An Investment Adviser Repre-sentative license application consists of aForm U-4, “Uniform Application for Se-curities Industry Registration or Transfer”for each Investment Adviser for whom theperson seeks to act as an Investment Ad-viser Representative. (An Investment Ad-viser Representative may act as an Invest-ment Adviser Representative for one ortwo Investment Advisers—see section1707.161(B)(1). In so acting, the Invest-ment Adviser Representative applicant mustsubmit evidence that both InvestmentAdvisers have been notified of the dualaffiliation). The application also includes afiling fee of $35, a fingerprint card, if oneis not already on file with the NASD orCRD, and evidence that the Investment



Adviser Representative meets the mini-mum competency standard.

Just as with existing licensing provi-sions for securities dealers and salesper-sons, and as with section 1707.151 provi-sions for Investment Adviser licensure, anInvestment Adviser Representative appli-cant must show that he or she has met theminimum competency standard by sub-mitting evidence that one or more of elevenspecified examinations has been met, thatone of five specified professional designa-tions has been achieved, or that the personhas been continuously registered as an in-vestment adviser with the SEC since on orbefore March 18, 1996. Further, as withlicensing provisions for securities dealersand securities salespersons and Investment

Advisers, the Division is required by stat-ute to make a determination of the “goodbusiness repute” of the applicant.

Like notice filings and InvestmentAdviser licenses, Investment Adviser Rep-resentative licenses are effective for thecalendar year and should be renewed priorto expiration. Late filings may incur anadditional fee.

“Phase-in” provisions, again, are ap-plicable to Investment Adviser Represen-tatives. Although compliance is not man-datory until December 31, 1999, Invest-ment Adviser Representatives have an in-centive to file early because the filing feepaid to the Division prior to October 1,1999, covers both the 1999 license and therenewal for the 2000 calendar year.

In conclusion, keep in mind severalgeneral guidelines for Investment Advisersand Investment Adviser Representatives in

Ohio and for each of the three new filingscreated by Am. Sub. H.B. 695:

• Exceptions from licensure donot require a filing with the Divi-sion.

• Effectiveness is for the calendaryear, therefore renewals should besubmitted prior to expiration at theend of each year.

• Late filings may be acceptedthrough January 10th and incur anadditional fee of one half the regu-lar fee.

• Updates to filing materialsshould be promptly submitted tothe Division.

• “Phase-in” provisions may beavailable.

Ms. Dye Joyce is the Division’s SecuritiesRegistration Supervisor.

by Caryn A. Francis

The Investment Adviser Act of 1940(the ’40 Act), focuses its prohibitions onseveral key areas which are most likely toresult in fraud, deception and misappro-priation. Am. Sub. H.B. 695 closely tracksthe ’40 Act and the rules promulgated there-under. New R.C. section 1707.44(M) setsforth the general prohibitions for invest-ment advisers (IAs) and investment adviserrepresentatives (IARs). The Division’s newrules promulgated under R.C. section1707.44(M) delineate the exceptions andthe manner in which compliance is pos-sible. In addition to incorporating the ’40Act prohibitions into the statute and rules,R.C. section 1707.44 extends the prohibi-tions against misrepresentations and unli-censed activity to investment advisers andinvestment adviser representatives. To com-pliment these new anti-fraud prohibitions,the Ohio Securities Act will now have stifferpenalties for those who violate R.C. sec-tions 1707.44 or 1707.042, and the rulespromulgated thereunder.

As a general rule, the prohibitionsunder the existing sections of R.C. 1707.44

remain essentially unchanged. R.C. sec-tion 1707.44(A) has been amended to pro-hibit any investment adviser, or invest-ment adviser representative1, from engag-ing in any act or practice in violation of newsections 1707.141 or 1707.161, respec-tively. R.C. sections 1707.141 and1707.161 require that all advisers be li-censed by the Ohio Division of Securities.

The prohibition against affirmativemisrepresentations under section1707.44(B) has been expanded to prohibitmaking any false representation in advisingfor compensation, as to the value of securi-ties, or as to the advisability of investing in,purchasing or selling securities, or in pro-curing an IA or IAR license. (See1707.44(B)(5) and 1707.44(B)(3), respec-tively).

A new section has been added toincorporate the prohibitions set forth insection 206 of the ’40 Act. R.C. section1707.44(M) and the applicable rules aregeared toward prohibiting certain types ofactivities which hold the greatest potentialfor abuse. These include, among other

things, advertising, custody, and payingsolicitors.

R.C. section 1707.44(M) is dividedinto three main subsections and closelytracks its federal counterpart. R.C. section1707.44(M)(1) prohibits fraudulent actsand practices, or schemes to defraud, andprohibits advisers from acting as a princi-pal for their own account while selling orpurchasing a security from a client, with-out first obtaining the client’s consent anddisclosing the capacity in which the adviseris acting. Paragraph (M)(1) also permitsthe adoption of rules by the Division toprevent fraudulent activities. The rulespromulgated under R.C. section1707.44(M)(1) contain significant prohi-bitions and will be addressed below. R.C.section 1707.44(M)(2) prohibits an IA orIAR from having custody of any securitiesor funds unless they have followed the rulespromulgated under this section. Finally,R.C. section 1707.44(M)(3) prohibits anyperson from making an untrue statementof material fact or omitting to state a mate-rial fact necessary to make the statementnot misleading, in the solicitation of clientsor prospective clients.

An Examination of the Changes to the Anti-Fraud Standards and Criminal Sanctions ofChapter 1707 in the Wake of Am. Sub. H.B. 695

IA and IAR LicensingContinued from page 13


The rules promulgated under R.C.section 1707.44(M) can be found at1301:6-3-44 (hereinafter “Rule 44”). Rules44(A)-(G) closely follow their correspond-ing federal counterparts, found in Section208 of the ’40 Act as well as ’40 Act rules206(4) and 206(3).

Because advisers act in a fiduciarycapacity to their clients, the advertisingrestrictions found in Rule 44(A) and its ’40Act companion, rule 206(4)-1, are fairlybroad. “Advertising” is defined in Rule44(A)(2) to include:

any notice, circular, letter or otherwritten communication addressedto more than one person, or anynotice or other announcement inany publication or by radio or tele-vision, which offers ... any analysis,report or publication ... or graph,chart, formula or other device,which is to be used in making anydetermination as to when to buy orsell any security, or which securityto buy or sell, or any other invest-ment advisory service.

As should be obvious, advertisementsmust not contain any false or misleadingstatements, and must not represent thatany report, analysis or other service will beprovided without charge, unless they are infact provided without any obligation what-soever.2

Rule 44(A) also prohibits advisersfrom using testimonials of any kind in theiradvertising, or from referring to past, spe-cific recommendations made by the ad-viser that were, or would have been profit-able3. There are, however, some excep-tions to the rule against using past, specificrecommendations. If the advertisementsets out or offers to furnish a list of all therecommendations made by the IA or IARwithin the immediately preceding periodof not less than a year, then such recom-mendation is permissible.4 However, if thelist is provided separately from the adver-tisement, such list must contain variousspecifics about the recommended securi-ties as well as a cautionary legend.5

Finally, Rule 44(A) prohibits repre-senting in an advertisement that any graph,chart, formula or other device can, in andof itself, be used to determine which secu-

rities to buy or sell.6 Again, there areexceptions to this rule. If the adviser promi-nently places disclosures in the advertise-ment about the limitations of the graphs,charts, etc., and the difficulties in using thesame, then they may be included.

Rule 44(B) addresses custody or pos-session of funds or securities of clients.Rule 44(B) and the corresponding federalrule are designed to protect clients from thepotential for abuse which can occur wherean adviser has physical custody of a client’sfunds or securities. Specifically, the rule isgeared toward avoiding the comminglingof funds, the loss of securities, and torequire a detailed accounting by the adviserwith regard to both.

Whereas R.C. section1707.44(M)(2) prohibits an adviser fromhaving custody of any funds or securities,Rule 44(B) sets forth the manner in whichcustody is permissible. An IA or IAR isdeemed to have custody if they directly orindirectly hold client funds or securities,have any authority to obtain possession ofthem, or have the ability to appropriatethem.7

For an adviser to have custody with-out violating the statute or rules, the ad-viser must adhere to the following six steps:(i) the IA must give notice to the Divisionin writing that they have or may havecustody. This notice can be given on FormADV.8 It should be noted that this provi-sion does not apply to a federally licensedadviser; (ii) any securities in the custody ofan adviser must be segregated, identifiedby client and kept in a safe place which isreasonably free from risk of destruction orother loss;9 (iii) any funds in the custody ofan adviser must be deposited in accountsheld in the name of the adviser, where theadviser is named as agent or trustee, andonly client funds are maintained in thoseaccounts. In addition, the adviser mustkeep a separate detailed record of eachclient’s interest in the bank account withdates and amounts of deposits and with-drawals;10 (iv) the adviser must notify theclient in writing of where and how thefunds or securities will be maintained; 11 (v)the adviser must send an itemized state-ment at least once every three months tothe client showing the funds and securitiesin their custody, and any debits, credits ortransactions in the clients account duringthat period;12 and (vi) the adviser must

have a surprise examination conducted byan independent accountant of all the fundsand securities in the custody of the ad-viser.13

The IA must file with the Division acertificate issued by the accountant de-scribing the nature and extent of the ex-amination that was made. A federallylicensed investment adviser must file withthe Division a copy of any certificate re-garding the independent accountant examat the time they file the same certificatewith the SEC.14

Finally, a broker-dealer licensed un-der section 15 of the Securities ExchangeAct of 1934 (the “ ’34 Act”), does not haveto comply with the six steps set forth above,so long as the broker-dealer is either: (i) incompliance with Rule 15c3-1 of the ’34Act (the net capital rule); or (ii) a memberof an exchange whose members are exemptfrom 15c3-1, and the broker-dealer is incompliance with all rules and settled prac-tices of the exchange imposing require-ments with respect to financial responsibil-ity and the segregation of funds or securi-ties carried for the account of customers.15

The corresponding ’40 Act rule for Rule44(B) is rule 206(4)-2.

Rule 44(C) sets forth the standardsan adviser must meet before they can makea cash payment to someone who solicits orrefers clients on their behalf (“a solicitor”).This rule primarily focuses on giving dis-closure to the client. The disclosure re-quirement exists to help ensure that theprospective client is put on notice that thesolicitor’s recommendation is not disinter-ested.

A solicitor who fails to give properdisclosure to the client may have enforce-ment action taken against him or her foracting as an unlicensed investment adviser.Failure to comply with all the provisions ofthis rule may also result in liability to theadviser for violating the anti-fraud provi-sions of the Ohio Securities Act.

To meet the standards of Rule 44(C),the IA or IAR engaging the solicitor mustbe either licensed by the Division, exceptedfrom licensure, or in the case of a federallylicensed IA, in compliance with theDivision’s notice filing requirements.16

Further, the solicitor and the adviser mustenter into a written agreement (the “Agree-ment”), which details the referral arrange-



ation of the advisers integrity or ability tomeet their contractual commitments to cli-ents.21 The rule lists a number of legal anddisciplinary events for which there is a rebut-table presumption of materiality.22 Theseinclude, among other things, criminal con-victions for fraud, certain administrative pro-ceedings before the SEC, and various pro-ceedings before self regulatory organizationssuch as the NASD. However, it is importantto note that an event may still be materialeven if it is not on the list.

Any adviser who has custody or discre-tionary authority over client funds or securi-ties, or, who requires advance payment ofadvisory fees of more than $500 for services tobe provided over periods greater than sixmonths, not only has to disclose any legal ordisciplinary event, but must also disclose anyfinancial conditions that are reasonably likelyto impair the adviser’s ability to meet contrac-tual commitments to clients.23

Rule 44(E) sets forth a series of generalprohibitions which corresponds to Section208 of the ’40 Act. Rule 44(E) prohibits anyadviser from representing or implying thatthey have been sponsored, recommended orapproved by, or had their abilities or qualifi-cations passed upon by the Division or anyother state or federal agency. However, it ispermissible for an adviser to represent thatthey are licensed by the Division or suchother agencies, if that is in fact true.24 Rule44(E) also prohibits advisers from using theterm “investment counsel” as descriptive oftheir business unless they in fact act as invest-ment advisers as their principal business, anda substantial part of their business consists ofrendering investment supervisory services.25

Finally, an adviser is prohibited from usingany person, directly or indirectly, to do any-thing that would result in a violation of theOhio Securities Act, if the adviser had donethe same act themselves.26

Rules 44(F) and 44(G) both addressagency cross transactions. The rule is tar-geted at situations where there is a potentialfor “double dipping” by advisers. Advisersact in a fiduciary capacity for their clients andagency cross transactions hold the potentialfor abuse by advisers who may have their selfinterests in getting a commission or other feeahead of their obligation to look out for theirclient. Rule 44(F) and ’40 Act Rule 206(3)-1 provide an exemption for advisers who are

licensed as dealers. Rule 44(G) and ’40 ActRule 206(3)-2 provide the means in whichan adviser, who is not otherwise exempt as adealer, may avoid the prohibition againstagency cross transactions.

Agency cross transactions occur wherethe adviser acts as broker for both an advisoryclient as well as the person on the other sideof the transaction. A broker-dealer registeredwith the Division as well as the SEC isexempt from the agency cross transactionprohibition, but only if one of three stan-dards apply: (i) the broker-dealer acts as anadviser solely by means of publicly distrib-uted written materials or oral statements, orby distributing materials which do not meetthe objectives or needs of specific individualsor accounts, (ii) the broker-dealer acts as anadviser solely by means of issuing statisticalinformation which contains no expressionsof opinion as to the investment merit of aparticular security, or (iii) if the broker-dealeracts as an adviser by distributing a combina-tion of the types of materials set forth above,then those materials must include a state-ment that the broker-dealer who is acting asan adviser may be acting as a principal fortheir own account or as an agent for anotherperson, in any transaction.27 Nothing in theexemption relieves the advisers of their dis-closure obligations under other provisions ofsection 1707.44(M).28

If the adviser is not a broker-dealerwho is exempt, then there are several stan-dards that must be met under Rule 44(G) toensure that the adviser does not run afoul ofthe agency cross transaction prohibition. First,the adviser must give full disclosure to theirclient about the nature of the agency transac-tions, and then obtain a written authoriza-tion from their client that grants the adviserpermission in the future to effect agency crosstransactions.29 With each agency cross trans-action, the adviser must provide a writtenconfirmation to the client setting forth anumber of items, including the nature of thetransaction, the amount of remunerationreceived, and who paid the remuneration tothe adviser.30 The adviser must give eachclient, at least annually, a written disclosurestatement which identifies the total numberof transactions during that period and thetotal amount of commissions or other remu-neration received.31

In addition, both the written confir-mation and the written disclosure statement

ment. The Agreement must contain anundertaking by the solicitor, and require thesolicitor to provide the client with a copy ofthe IA’s current “brochure” and a copy of thesolicitor’s separate written disclosure docu-ment.17 The adviser must also retain copies ofsuch Agreement as required under the Divi-sion books and records rules. Finally, the IAmust receive from the client a written ac-knowledgment stating that the client hasreceived the solicitor’s separate written dis-closure document, along with a copy of theIA’s “brochure”.18

The requirements set forth above donot apply to a solicitor who (i) is a partner,officer, director, or employee of the Invest-ment Adviser; (ii) has those same positionswith an entity that is controlled by or is undercommon control with the Investment Ad-viser; or (iii) isn’t affiliated with the Invest-ment Adviser, but he or she is solicitingclients for an adviser who provides only im-personal investment advice (i.e., written ma-terials or other statements do not purport tomeet the objectives or needs of a specificclient).

Even if the solicitor can meet the testsenumerated above, an adviser cannot pay asolicitor who has been a “bad apple”. Theseinclude solicitors who, among other things,have been subject to certain types orders bythe SEC, or who have been convicted ofcertain felonies or misdemeanors within thelast 10 years. Finally, the adviser must makea good faith effort to ensure that the solicitorhas complied with all the provisions of theirAgreement.19 The corresponding ’40 Actrule for Rule 44(C) is Rule 206(4)-3.

Rule 44(D) tracks Rule 206(4)-4 ofthe ’40 Act, which deals with disclosure ofcertain material events. These material eventsinclude financial events, and legal or disci-plinary events, both of which may be dis-closed in the adviser’s brochure. These mate-rial events must be disclosed promptly toexisting clients, and at least 48 hours beforeentering into any advisory contract with aprospective client. An adviser may make thisdisclosure at the time of entering into thecontract, if the client has an opportunity toterminate the contract, without penalty,within five business days.20

Every adviser must disclose any legal ordisciplinary event that is material to an evalu-

Anti-Fraud StandardsContinued from page 15


are required to have conspicuous statementsthat the written consent previously grantedby the client may be revoked at any time.32 Atno time may any adviser, or anyone control-ling, controlled by or under common controlwith the adviser, recommend a transaction toboth the buyer and seller involved.33

Finally, even if advisers meet all thestandards enumerated above, they must besure to always give the client the best price onsecurities, as well as “best execution”, whichmeans that trades are executed on client’sbehalf such that the client’s total cost orproceeds in each transaction is the mostfavorable under the circumstances. In assess-ing whether this standard is met, an advisershould consider the full range and quality ofa broker’s services, including such things asthe broker’s execution capability, commis-sion rate, financial responsibility, responsive-ness to the adviser, and the value of anyresearch services provided.34

R.C. section 1707.99 sets forth thepenalties for violations of R.C. sections1707.042 or 1707.44. From 1982 through1996, a criminal conviction for a violation ofthese sections was punishable as a fourthdegree felony and a fine not exceeding $2,500.A fourth degree felony allowed for a maxi-mum of 18 months in prison. In 1995, dueto Am. Sub. Senate Bill No. 2, this punish-ment was down-graded to a fifth degreefelony. Am. Sub. H.B. 695 will revamp thestructure of R.C. section 1707.99. Thepenalties section of the Ohio Securities Actwill now be a sliding scale based on theamount of funds or securities involved in theoffense or the loss to the victim. This slidingscale was based upon a scale established in the“Exploitation of the Elderly” bill, H.B. 632.35

The following is a summary of thepenalties for violations of R.C. 1707.44, therules promulgated thereunder, and R.C.1707.042:

a. Less than $500 = a fifth degreefelony (up to 12 months in prison)and a fine of up to $2,500. (R.C.section 1707.99(A))

b. $500 or more but less than $5,000= a fourth degree felony (up to 18months in prison) and a fine of up to$5,000. (R.C. section 1707.99(B))

c. $5,000 or more but less than$25,000 = a third degree felony (upto 5 years in prison) and a fine of upto $10,000. (R.C. section1707.99(C))

d. $25,000 or more but less than$100,000 = a second degree felony(up to 8 years in prison) and a fine ofup to $15,000. (R.C. section1707.99(D))

e. $100,000 or more = a first degreefelony (up to 10 years in prison) anda fine of up to $20,000. (R.C. section1707.99(E))

As a result of the sliding scale penalties,violations of the anti-fraud provisions ofthe Ohio Securities Act will subject thewhite collar criminal to substantial punish-ment.

For each new section and rule underthe Ohio Securities Act, there is a corre-sponding section or rule from the ’40 Act.As a result, those investment advisers andinvestment adviser representatives who havebeen adhering to the requirements of the’40 Act and its rules, will not run afoul ofthe Ohio Securities Act’s new prohibi-tions. However, for those who knowinglyviolate the anti-fraud prohibitons of theSecurities Act, there are stiff new penaltieswhich may result in significant jail time.

Endnotes

1 IAs and IARs may alternatively bereferred to as “advisers” throughout thisarticle.

2 O.A.C. Rule 1301:6-3-44(A)(1)(d)and (e)

3 O.A.C. Rule 1301:6-3-44(A)(1)(a)and (b)

4 O.A.C. Rule 1301:6-3-44(A)(1)(b)5 O.A.C. Rule 1301:6-3-

44(A)(1)(b)(i) and (ii)6 O.A.C. Rule 1301:6-3-44(A)(1)(c)7 Form ADV Instructions: “Gen-

eral Definitions”8 O.A.C. Rule 1301:6-3-44(B)(1)9 O.A.C. Rule 1301:6-3-44(B)(2)

10 O.A.C. Rule 1301:6-3-44(B)(3)(a)-(c)

11 O.A.C. Rule 1301:6-3-44(B)(4)12 O.A.C. Rule 1301:6-3-44(B)(5)13 O.A.C. Rule 1301:6-3-44(B)(6)14 O.A.C. Rule 1301:6-3-44(B)(6)15 O.A.C. Rule 1301:6-3-44(B)(7)(a)

and (b)16 O.A.C. Rule 1301:6-3-44(C)(1)(a)17 O.A.C. Rule 1301:6-3-

44(C)(1)(d)(ii) and (iii).Note: Although this rule only re-

quires third party solicitors to provide acopy of the IA’s brochure, solicitors whoare either affiliated with the IA, or solicit-ing clients for the provision of impersonalinvestment advice, also have to provideprospective clients with a copy of the IA’sbrochure under separate provisions of the’40 Act rules.

18 O.A.C. Rule 1301:6-3-44(C)(1)(e)19 O.A.C. Rule 1301:6-3-44(C)(1)(f)20 O.A.C. Rule 1301:6-3-44(D)(3)21 O.A.C. Rule 1301:6-3-

44(D)(1)(b)22 O.A.C. Rule 1301:6-3-

44(D)(2)(a)-(c)23 O.A.C. Rule 1301:6-3-44(D)(1)(a)24 O.A.C. Rule 1301:6-3-44(E)(1)

and (2)25 O.A.C. Rule 1301:6-3-44(E)(3)(a)

and (b)26 O.A.C. Rule 1301:6-3-44(E)(4)27 O.A.C. Rule 1301:6-3-44(F)(1)(a)-

(d)28 O.A.C. Rule 1301:6-3-44(F)(3)29 O.A.C. Rule 1301:6-3-44(G)(1)(a)30 O.A.C. Rule 1301:6-3-

44(G)(1)(b)(i)-(iv)31 O.A.C. Rule 1301:6-3-44(G)(1)(c)32 O.A.C. Rule 1301:6-3-

44(G)(1)(d)33 O.A.C. Rule 1301:6-3-44(G)(1)(e)34 Exchange Act Release No. 23170

(April 23, 1986)35 H.B. 632 is expected to be rein-

troduced in 1999.

Ms. Francis is the Attorney Inspectorfor the Division.


Several new provisions included inthe newly enacted Am. Sub. H.B. 695 willsignificantly impact the Division of Secu-rities’ enforcement functions. The mostnotable change in the code sections thatimpact the Division’s enforcement author-ity is that Investment Advisers (IAs) andInvestment Adviser Representatives (IARs)will be subject to the same investigatoryremedies and procedures that now apply toother sellers and issuers of securities.

The meatier new provisions are foundin R.C. 1707.23. This section is the linch-pin of the Division’s enforcement func-tion, since it outlines how the Divisionmay investigate violations of the securitiesact, as well as actions the Division may takeagainst violators. R.C. 1707.23(A) for-merly required “any person to file with (theDivision)...as to any facts or circumstancesconcerning the issuance, sale, or offer forsale of securities within this state by saidperson...” This section has been revised toallow the Division to require filings con-cerning “...the person’s acts or practices asan investment adviser or investment ad-viser representative within this state...” R.C.1707.23(B) has always allowed the Divi-sion to examine sellers, dealers, salesper-sons and issuers under oath, as well as toexamine books and records held by thesame. The revised version of this codesection will now permit the same examina-tions of IAs and IARs.

R.C. 1707.23(D) allows for the sus-pension and revocation of licenses issuedby the Division that will now be held byIAs and IARs, as well as for dealers andsalespersons. This section references R.C.1707.19, which more specifically addressesviolations that can lead to suspension andrevocation of these licenses. R.C. 1707.23(E) currently allows the Division to initiatecriminal proceedings for violations of pro-hibitions found in sections R.C. 1707.042and R.C. 1707.44. These prohibitionsaddress, among other things, the conductof parties involved in control bids, selling

unregistered securities and making misrep-resentations in the course of selling securi-ties. As revised, R.C. 1707.23(E) allowsthe Division to also initiate criminal pros-ecutions for violations of any rules adoptedunder these sections. R.C. 1707.23(F) willrequire IAs to furnish to the Division cop-ies of brochures, advertisements, publica-tions, analysis or reports or any writingsthey publish or distribute. This sectionformerly required the same of securitiesdealers.

R.C. 1707.23(H) allows the Divi-sion to issue Cease and Desist Orders againstpersons who violate provisions found inChapter 1707 of the Revised Code. Therevised version of this statute will addition-ally allow such orders to be issued forviolations of rules adopted under the chap-ter. Finally, an entirely new provision,R.C. 1707.23(I), allows the Division toissue and initiate contempt proceedingsregarding subpoenas and subpoenas ducestecum at the request of securities adminis-trators of other states, if “it appears to theDivision that the activities for which theinformation is sought would violate Chap-ter 1707 of the Revised Code if the activi-ties had occurred in this state.” This wouldallow greater cooperation with other states’enforcement efforts against scam artistswho operate across state borders. TheDivision would in effect enforce subpoe-nas for cooperating out-of-state regulatorswho are pursuing targets residing in Ohio.

R.C. 1707.25 currently allows theDirector of Commerce to apply to com-mon pleas court for an injunction restrain-ing the issuance, sale or offer for sale ofsecurities by persons who fail to obey aDivision subpoena or fail to provide infor-mation or testimony as required by theDivision pursuant to its authority. Newlanguage also allows such an injunction torestrain persons from acting as an IA orIAR under these circumstances. R.C.1707.27 allows the Division to seek a re-ceivership against any person who has com-

mitted a “substantial violation” of R.C.1707.01 to 1707.45 or who has used anyact, practice or transaction “declared to beillegal, prohibited or declared fraudulent”to the material prejudice of purchasers orholders of securities. The revised version ofthe statute amends this language to allowsuch receiverships where clients of IAs orIAR’s are involved, as well as purchasers orholders of securities.

R.C. 1707.36 deals with the powersof the Attorney-Inspector. The Attorney-Inspector is essentially the head lawyer ofthe Division’s enforcement section. Thepowers of this office have been expanded.The former version required the Attorney-Inspector to investigate and report upon allcomplaints and alleged violations of thelaws relating to the issuance and sales ofsecurities. The revised version allows theAttorney-Inspector to investigate possibleviolations of rules promulgated under theselaws. This expanded investigatory author-ity would include all statutory revisionsand rules applying to IAs and IARs. R.C.1707.36 has also been changed to desig-nate the Office of the Attorney-Inspector acriminal justice agency in “investigatingreported violations of law relating to secu-rities and investment advice.” This wouldallow the enforcement attorneys workingon behalf of the Division access to thecomputerized databases administered bythe National Crime Information Center orthe Law Enforcement Automated DataSystem (LEADS) in Ohio, as well as toother computerized databases dispensingcriminal justice information.

Finally, R.C. 1707.22 extends ap-peal rights currently available to dealersand salespersons to IAs and IARs whoselicenses have been suspended, refused, re-voked or denied renewal. These appealrights are found in Chapter 119 of theRevised Code.

New Law to Impact Enforcement of Securities ProvisionsBy Desiree T. Shannon

Ms. Shannon is an Enforcement StaffAttorney with the Divison and Editor of theOhio Securities Bulletin.


By Michael P. Miglets

Commissioner’s Note: The most com-mon way for an investment adviser to deter-mine whether it is under the jurisdiction ofthe SEC or the Division is to determine its“assets under management.” This calcula-tion is made pursuant to a set of standardspromulgated by the SEC. The Division doesnot administer these standards, but does pro-vide the following article as an overview of the“assets under management” determination.

After the enactment of the NationalSecurities Markets Improvement Act of1996 (“NSMIA”), investment advisers withprincipal offices and places of business inOhio were permitted to remain registeredwith the Securities and Exchange Com-mission (“SEC”). While NSMIA gave theSEC jurisdiction over investment adviserswith assets under management in excess of$25,000,000 and the states jurisdictionover the smaller investment advisers, theSEC also retained jurisdiction over all in-vestment advisers in states which did notregulate investment advisers. As the OhioSecurities Act did not include investmentadviser regulations, investment adviserswith a principal office and place of businessin Ohio remained registered with the SECregardless of the amount of assets undermanagement. With the effectiveness ofAm. Sub. H.B. 695 on March 18, 1999,investment advisers in Ohio will be re-quired to determine if they may remainregistered with the SEC under Section203(A) of the Investment Advisers Act of1940 or if they must become licensed withthe Division.

Schedule I to the Form ADV re-quires an investment adviser to indicatethat it has assets under management of atleast $25,000,000.00 to remain registeredwith the SEC, unless the investment ad-viser has its principal office and principalplace of business in Wyoming or meets oneof eight other conditions. Instruction No.7 provides investment advisers with a seriesof definitions and tests to be used in deter-mining the total assets under management.The key factors in determining the amountof assets under management are: (1) whetherthe account is a securities portfolio; (2)what is the value of the portfolio; and (3)

The $25,000,000 Question for Ohio Investment Advisers

Continuous and regular supervi-sory or management services include: (1)accounts where the investment adviserhas discretionary authority and providesongoing supervisory or management ser-vices; or (2) accounts where the invest-ment adviser does not have discretionaryauthority, but has an ongoing responsi-bility to select or make recommenda-tions, based on the needs of the client, asto specific securities or other investmentsthat the account may purchase or sell,and if such recommendations are ac-cepted by the client, the investment ad-viser is responsible for arranging or ef-fecting the transaction. Factors to con-sider include: (1) the terms of the advi-sory contract; (2) form of compensation;and (3) the management practice of theinvestment adviser.

The fact that an advisory contractindicates that ongoing management ser-vices will be provided suggests that theaccount receives continuous and regularsupervisory or management services. Thispresumption may be rebutted by otherprovisions of the advisory contract or theactual services provided by the invest-ment adviser.

If compensation under the advi-sory contract is based on the averagevalue of assets under management over aspecified period of time, this suggeststhat the investment adviser is providingcontinuous and regular supervisory ormanagement services. Payments basedon hourly fees or retainers based on apercentage of assets covered by a finan-cial plan do not indicate that the invest-ment adviser is providing continuousand regular supervisory or managementservices. The SEC’s examples of ac-counts which do not receive continuousand regular supervisory management ser-vices include, but are not limited to: (1)accounts where the investment adviserprovides only market timing recommen-dations to buy or sell; (2) impersonaladvice such as newsletters; (3) accountswhere the investment adviser providesonly an initial asset allocation with noon-going monitoring or reallocation; and

whether the investment adviser providescontinuous and regular supervisory ormanagement services.

To constitute a securities portfolio,an account must have at least 50% of itstotal value in securities. For purposes ofthe 50% test, cash and cash equivalents,including bank deposits, certificates of de-posit, bankers acceptances and similar bankinstruments, are treated as securities. Secu-rities portfolios may include: (1) familyand proprietary accounts of the investmentadviser, unless the investment adviser is asole proprietor; (2) accounts for which theinvestment adviser receives no compensa-tion; and (3) accounts of clients who arenot U.S. residents. For a sole proprietor,personal assets of the investment advisermust be excluded from the assets undermanagement.

Once an investment adviser has de-termined the account is a securities portfo-lio, the investment adviser must determinethe value of the securities portfolio. Theentire amount of the securities portfolio isto be included if the investment adviserprovides continuous and regular supervi-sory or management services. If the invest-ment adviser provides continuous and regu-lar supervisory or management services foronly a portion of the securities portfolio,only that amount which receives such ser-vices need be included for purposes ofdetermining assets under management. Forexample, if only $2,000,000 of a$10,000,000 securities portfolio is man-aged by an investment adviser, only$2,000,000 will apply toward the assetsunder management test for that invest-ment adviser. The value of real estate orbusinesses, which are managed on behalf ofa client but not as an investment, also mustbe deducted from the value of the securitiesportfolio. So, if an investment adviserserved as a rental agent for a client’s realestate, the value of the real estate may bededucted from the total value of the secu-rities portfolio. Finally, the full value ofsecurities purchased on margin is includedto determine if the investment adviser has$25,000,000 or more of assets under man-agement.



By Deborah Dye Joyce

A defining characteristic of manystate securities laws, including the OhioSecurities Act, is the authority of the statesecurities administrator to approve or denya proposed securities offering based onqualitative standards. The common namefor this process of considering the substan-tive terms and conditions of an offering is“merit review.” However, Title I of theNational Securities Markets ImprovementAct of 1996 (NSMIA) entitled the “Capi-tal Markets Efficiency Act of 1996” pre-empted the states’ abilities to conduct meritreviews on offerings involving the federallydefined category of “covered securities,”but specifically preserved the states’ rightsto receive notice filings. In addition, theNSMIA specifically preserved the states’rights to investigate and bring enforcementactions with respect to fraud or deceit, andto suspend offers or sales of “covered secu-rities” as a result of the failure to submit anyfiling or fee required by state law andpermitted by the NSMIA. See section 102of the NSMIA as it amended section 18 ofthe Securities Act of 1933.

Securities Notice Filings Under New R.C. 1707.092(4) accounts where the investment ad-vice is on an intermittent or periodicbasis, such as an account reviewed on anannual or quarterly basis, at the requestof the client or in response to a marketevent. Examples of accounts with con-tinuous and regular supervisory or man-agement services include: (1) accountswhere the investment adviser allocatesassets among a series of mutual funds,even without discretionary authority ifthe account receives continuous reviewand management; and (2) accounts wherethe investment adviser allocates assetsamong other investment advisers under agrant of discretionary authority with theability to hire and fire investment advis-ers and to reallocate assets.

If an investment adviser includesassets which are managed on a non-dis-cretionary basis to meet the $25,000,000assets under management test to remainregistered with the SEC, the investmentadviser must provide a typed statementwith Schedule I detailing the nature ofthe supervisory or management servicesprovided to the non-discretionary ac-counts. This statement is to verify thatthe investment adviser is actually provid-ing continuous and regular supervisoryor management services. The statementwould not have to include any informa-tion on the discretionary accounts man-aged by the investment adviser. If theinvestment adviser manages in excess of$25,000,000 of assets in discretionaryaccounts, this statement does not have tobe provided as the $25,000,000 or moreof assets under management test has al-ready been satisfied.

For specific questions regarding thecompletion of Schedule I and the stan-dards to continue to maintain an SECregistration, an investment adviser maycontact the SEC’s Task Force on Invest-ment Adviser Regulation at (202) 942-0716. Investment advisers with less than$25,000,000 of assets under manage-ment may contact the Division at (614)644-7381 to obtain a packet with infor-mation on the Division’s licensing pro-cedures. Additional information onOhio’s investment adviser regulations isavailable on the Division’s website athttp://www.securities.state.oh.us.

Phase-In Provisions of Am. Sub. H.B. 695

By Thomas E. Geyer

Phase-in provisions of Am. Sub. H.B. 695 are applicable to certain investmentadvisers and investment adviser representatives and are designed to provide time fora smooth transition from federal to state oversight.

R.C. 1707.141(C)(1) provides that if on March 18, 1999, a person is registeredas an investment adviser with the SEC and is required to be licensed as an investmentadviser by the Division, that person has until December 31, 1999, to become licensedby the Division. Similarly, R.C. 1707.141(C)(2) provides that if on March 18, 1999,a person is registered as an investment adviser with the SEC and is required to makea notice filing with the Division, that person has until December 31, 1999, to makeits initial notice filing with the Division.

To encourage advisers to make license and notice filings before the end of 1999,R.C. 1707.17(B)(3) and (4) provide that license or notice filing fees paid to theDivision on or before October 1, 1999, will cover the initial filing as well as therenewal for the 2000 calendar year.

Finally, R.C. 1707.161(F) provides that if on March 18, 1999, a person isrequired to be licensed as an investment adviser representative by the Division, thatperson has until December 31, 1999, to become licensed as an investment adviserrepresentative by the Division.

Filings with the states by issuers of“covered securities” are called notice fil-ings and are the subject of this article.Although the category of “covered securi-ties” created by the NSMIA includes sev-eral different types of offerings includingcertain listed securities, sales to qualifiedpurchasers, and securities of certain feder-ally exempt offerings (the largest categoryof which involves Rule 506 offerings—see“Rule 506 Amendments and Ohio’s ModelAccredited Investor Exemption” elsewherein this issue of the Bulletin), this article willprimarily deal with offerings by invest-ment companies which have registered orhave filed a registration statement with theSecurities and Exchange Commission(SEC).

Prior to the NSMIA, investmentcompanies, more generally known by thepublic as “mutual funds,” filed applica-tions for registration with both the SECand the Ohio Division of Securities (Divi-sion). The applications filed with theDivision for registration by coordinationor qualification received a substantive, ormerit, review. As a result of the NSMIA,investment companies must still make a

Continued from page 19$25,000,000 Question


calculated fee of one tenth of one per centof the aggregate amount of securities soughtto be sold in Ohio. The calculated fee hasa minimum of $100 and a maximum of$1000. Consequently, an investment com-pany issuer wishing to sell an aggregateamount of $1,000,000 or more of securi-ties in Ohio—including an indefiniteamount—would submit maximum totalfiling fees of $1100. (See sections1707.092(A)(1)(b), 1707.092(A)(2)(b),and 1707.092(B)(1).)

Since there is not a notice filing“form” that is filed with the SEC—rathera registration statement is used—section1707.092 gives the investment companythe option of submitting either a copy ofthe registration statement or the uniformForm NF or U-1. If the registration state-ment is used as the notice filing, a separateprospectus and statement of additional in-formation is not necessary as those docu-ments are contained therein. Use of theForm NF or U-1 necessitates the filingwith the Division of a prospectus and state-ment of additional information.

Historically, both the investmentcompany industry and the Division preferthe use of either the Form NF or the FormU-1 due to the clarity with which theinformation is relayed on the uniformforms. (For example, the issuer may notwish to sell in Ohio all that is contained inthe federal registration statement. On theother hand, use of the uniform forms al-lows the issuer to clarify what fund(s),

filing with the Division, but the filing nolonger receives a merit review and substan-tive comments are no longer issued by theDivision.

As a first step in aligning the OhioSecurities Act with the “covered securities”provisions of the NSMIA, Ohio Adminis-trative Code 1301:6-3-09 was amended onAugust 4, 1997 to delete the merit stan-dards for investment company offeringsand to set forth the procedures in Ohio formaking notice filings by investment com-panies. Section 1707.092 of Am. Sub.H.B. 695 goes one step further by codify-ing the notice filing provisions permittedby the NSMIA for investment companiesand offerings of securities involving “cov-ered securities” that are not otherwise sub-ject to sections 1707.02 through 1707.091of the Revised Code.

Notice filings by managed or non-managed investment companies should besubmitted to the Division prior to sales inOhio. Specifically, the notice filing con-sists of a duly executed consent to service ofprocess pursuant to Revised Code 1707.11(which may be incorporated by reference ifpreviously filed with the Division—see sec-tion 1707.092(B)(2)), a two prong filingfee, and (1) a copy of the federal registra-tion statement or (2) a Form NF or U-1and a copy of the fund’s most recent pro-spectus and statement of additional infor-mation.

As noted, the filing fee is two-prongedand includes a flat fee of $100 plus a

portfolio(s), and class(es) are to be eligiblefor sale in the state, despite what is con-tained in the often voluminous registrationstatements.) Name changes and increasesto the amount eligible to be sold in Ohioare also made on the Form NF or U-1.

Copies of the final prospectus for aninitial filing for either a managed or non-managed investment company should befiled with the Division once SEC effective-ness is obtained. See section1707.092(A)(1)(c) and 1707.092(A)(2)(c).

Investment companies seeking torenew a notice filing should look to theprovisions of OAC 1301:6-3-09(D).Whether an initial or renewal filing, aninvestment company notice filing is effec-tive for thirteen months and should berenewed prior to expiration. See section1707.092(D). The Division will issue aCertificate of Acknowledgement to the is-suer upon receipt of a complete noticefiling.

Whereas section 1707.092(A) and(B) generally pertain to offerings by feder-ally registered investment companies, sec-tion 1707.092(C) contains the notice fil-ing provisions for offerings involving “cov-ered securities” that are not otherwise sub-ject to sections 1707.02 through 1707.091of the Revised Code. As with other noticefilings, the components of notice filingsmade pursuant to this section are a consentto service of process, filing fees, and copiesof documents filed with the SEC.


Sections of the Ohio Securities Act Added or Amended by Am.Sub. H.B. 695(new sections appear in italics)

§ 1707 Brief Description

.01(B) reference to “bond investment companies” deleted

.01(E) “issuer” exception from the definition of “dealer”amended to include “member or manager of”

.01(O) definition of “bank” amended to include “creditunions”

.01(X) definition of “investment adviser” amended

.01(II) definition of “investment adviser representative” added

.01(JJ) definition of “supervised person” added

.01(KK) definition of “excepted person” added

.03(Q)(1) reference to “or any rule . . . made to carry outsection 4(2)” deleted

.03(W)(2) citation to SEC rules corrected

.03(W)(5) waiver authority deleted

.03(X) exemption for sale pursuant to federal Rule 506 added

.03(Y) “model accredited investor” exemption added

.092 investment company notice filing provision added

.093 authority to accept electronic filings added

.11 references to 03(X), 03(Y), and notice filings added

.14(A)(1)(b) dealer licensing exception amended to include 03(X)and 03(Y)

.141 investment adviser licensing and notice filing require-ment added

.151 investment adviser license application procedures added

.161 investment adviser representative licensing requirementand license application procedures added

.17 license renewal and fee provision amended to includeinvestment advisers and investment adviser represen-tatives

.18 license transfer provision amended to include invest-ment advisers and investment adviser representatives

.19 license refusal, suspension and revocation provisionamended to include investment advisers and invest-ment adviser representatives

.20 rulemaking authority amended to include reference to“clients or prospective clients”

.22 appeal rights amended to include investment adviserand investment adviser representative

.23 enforcement powers amended to include references toinvestment advisers and investment adviser representa-tives; reciprocal subpoena authority added

.25 injunctive authority amended to include investmentadvisers and investment adviser representatives

.27 receivership provision amended to include investmentadviser and investment adviser representative

.36 designation of attorney inspector as a “criminal justiceagency” codified

.391 corrective filing provision amended to include 03(X)and 03(Y)

.42 civil liability provision amended to add civil liability forinvestment advisers and investment adviser representa-tives

.431 “bringing together” exception amended to excludeinvestment advisers and investment adviser representa-tives

.44(A)(2)prohibition on violating investment adviser or investmentadviser representative licensing or notice filing obligationadded

.44(B)(5) prohibition on false representations for purposes of givinginvestment advice added

.44(M) investment adviser and investment adviser representativeanti-fraud standard added

.46 authority of the commissioner amended to includereference to investment adviser and investment adviserrepresentatives

.48 record retention provision amended to give Divisionrulemaking authority regarding record retention

.99 penalty provision amended


Licensing Fees Under the Ohio Securities Act(including Am. Sub. H.B. 695, eff. 3/18/99)

LICENSELATE

RENEWAL2

TIMELYRENEWAL1

INITIALAPPLICATION

SecuritiesDealer

SecuritiesSalesperson

InvestmentAdviser

InvestmentAdviserNotice Filing

InvestmentAdviserRepresentative

$30 per salesperson,3 butnot less than $150 nor

more than $5,000.(1707.17(B)(1))

$50(1707.17(B)(2))

$200(1707.17(B)(3))

$100(1707.17(B)(4))

$35(1707.17(B)(5))

$30 per salesperson, butnot less than $150 nor

more than $5,000.4

(1707.17(B)(1))

$506

(1707.17(B)(2))

$200(1707.17(B)(3))

$100(1707.17(B)(4))

$35(1707.17(B)(5))

$30 per salesperson, butnot less than $150 normore than $5,000, plusone-half of that figure.5

(1707.17(B)(1))

$506

(1707.17(B)(2))

$300(1707.17(B)(3))

$150(1707.17(B)(4))

$52.50(1707.17(B)(5))

Notes

1. A “timely renewal” is a renewal received by the Ohio Division of Securities (the “Division”) by December 31 of the calendar year inwhich the license is set to expire.

2. A “late renewal” is a renewal received by the Division between January 1 and January 10 of the calendar year immediately subsequentto the calendar year in which the license was set to expire.

3. Per salesperson licensed with the Division. Zero to five salespersons result in the minimum of $150, and $30 is added for each additionalsalesperson, up to $5,000.

4. Because the renewal fee is a “calculated fee,” not a “fixed fee,” dealer license renewal fees cannot be processed by the CRD system.Instead, the Division’s Renewal Questionnaire and dealer license renewal fee must be sent directly to the Division.

5. For example, a dealer whose timely renewal fee is $5,000 would pay a late renewal fee of $7,500.

6. In contrast to the dealer license renewal fee discussed in note 4, NASD members must pay this salesperson license renewal fee throughthe CRD system.


Supervision of Independent Contractors

Commissioner's Note: Reprinted below is a letter from Lori Richards of the Securities and Exchange Commissionregarding the supervision of independent contractors. The Division shares the views of the Commission and expectsOhio licensed securities dealers to have in place a system of supervising independent contractors that satifies the dealer'ssupervisory obligations under the Ohio Securities Act and related adminstrative rules. This letter is reprinted with thepermission of the Commission.

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20005

April 8, 1998Marc E. LackritzPresidentSecurities Industry Association1401 Eye Street, NWWashington, D.C. 20005-2225

Re: Supervision of Independent Contractors

Dear Marc:

I am writing today to alert your members to an area of focus for Commission and Self-Regulatory Organizationexaminers -- supervision by broker-dealers employing independent contractors.

Broker-dealers must supervise registered representatives who are independent contractors. As the Court ofAppeals for the Ninth Circuit held in Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990)(en banc), there isno support in the federal statutory scheme for distinguishing between registered representatives who are employees oragents, and those who are independent contractors. Thus, when we examine broker-dealers employing independentcontractors, regardless of the securities product they may sell, we expect to find adequate supervisory systems within themeaning of Section 15(b)(4)(E) of the Exchange Act.

Of, course, we recognize that each broker-dealer may develop its own supervisory system. We do not believethat there is any one "model" supervisory system that must be followed by all firms. We do believe, however, consistentwith the Exchange Act, that all broker-dealers should have a system in place which can reasonably be expected to preventand detect, insofar as practicable, violations by supervised persons. As the Commission has recognized in two enforce-ment actions, Consolidated Investment Services, Inc., 61 SEC Docket 21 (Jan. 5, 1996) and Royal Alliance Associates, Inc.,63 SEC Docket 1843 (Jan. 15, 1997)(settled), even the small and remote offices often used by independent contractorsmust be supervised.

In sum, I would like to remind your members that independent contractors must be supervised, and thatoversight of such supervision is a priority for the Commission's examination program. If you wish, you may share thisletter with your members.

Sincerely,

Lori A. Richards

cc: Stuart KaswellSenior Vice President and General Counsel


Saving and Investing Education Week

The Council of Securities Regulatorsof the Americas (COSRA) organized a firstever week-long campaign, Saving and Invest-ing Education Week, held from March 29 toApril 4, 1998. The Campaign was aimed ateducating the public, from Canada to Chile,on savings, investing and avoiding securitiesfraud. Twenty-one countries throughout theWestern Hemisphere held educational eventsfor their citizens during this week.

The North American Securities Ad-ministrators Association (NASAA) workedwith the U.S. Securities and Exchange Com-mission and other organizations in U.S.A. inplanning events for this week. In Canada, theCanadian Securities Administrators (CSA)coordinated investor educational provincialinitiatives for this week.

Much time and effort was put into themany educational events held throughoutOhio during this week. The following sum-mary includes a brief description of investoreducation initiatives by the Division duringthis week:

• Seminar Programs. On March30th, former Director of Commerce DonnaOwens and American Association of RetiredPersons (AARP) Ohio President Joseph C.Sommerville kicked off the Saving and In-vesting Education Week at the Eleanor M.Kahle Senior Center in Toledo by announc-ing a new “telephone hotline” sticker for theDivision’s toll-free number. Presentationswere also made by Owens at the ChillicotheChapter of Public Employees RetirementSystem on March 24th, and by Commis-sioner Tom Geyer and other staff to civicgroups, senior citizen centers, and Ohio highschools and colleges throughout the week.On April 2nd, Owens and CommissionerTom Geyer introduced the “Investor Bill ofRights” during a presentation at the FairbornSenior Center. Commissioner Geyer intro-duced “Investment Scams: What Con ArtistsDon’t Want You To Know,” the new inves-tor education video produced by the IPT, atthe Garfield Heights Senior Center on March31st.

• In-School Programs. In-schoolpresentations were a focus of Ohio’s cam-

paign. Former director Owens, Commis-sioner Geyer and Division staff visited 10-15high school and college classes around thestate throughout the week. The presentationsstressed the importance of personal financialplanning and how to protect yourself frominvestment and securities fraud.

• Media Programs. The Divisionunveiled an enhanced version of its Web siteat a press conference, which also includesadditional investor education informationand an “on-line” complaint filing system at anews conference on March 31st. Commis-sioner Tom Geyer appeared on a talk radioshow and on television in Youngstown onApril 2nd. The Department distributed aseries of investor education articles to localnewspapers and issued a news release prior toeach planned event. The Department alsoissued news releases that highlighted a par-ticular aspect of saving and investing daily.The Division’s activities throughout the weekwere covered by numerous television sta-tions, radio stations and newspapers.

• Money 2000. The Division pro-moted Money 2000 during the campaignweek in connection with the in-school pro-grams. The Division coordinated effortswith The Ohio State University Extensionprogram, who promotes this program lo-cally.

• Ballpark Estimate. The Divisiondistributed the Ballpark Estimate during thecampaign in connection with the staff’s pre-sentations.

• Other Programs. GovernorGeorge Voinovich issued a proclamation de-claring the week of March 29th - April 4th tobe “Saving and Investing Education Week”in the State of Ohio.

• Distribution of Investor Educa-tion Materials. The Division distributedinvestor education materials in connectionwith all seminar presentations and in-schoolprograms. The new investor education video:“Investment Scams: What Con Artists Don’tWant You To Know” was sent to approxi-mately 200 Ohio libraries. A new telephonesticker was distributed that reminds people to“investigate before investing” and lists theDivision’s toll-free investor protection hotline.Two new pamphlets, “Bulletin For OlderInvestors” and “How to Spot Boiler Room

Scams” were released along with a new inves-tor education folder.

Seven Commerce employees madepresentations in conjunction with this weekto various types of groups, including thefollowing: preparatory school students, theRotary Club, vocational students, the UrbanLeague, high school students, Senior Cen-ters, college business and law students, PublicEmployee Retirement System Retirees, andcareer center students. Over twenty newsorganizations, including newspapers, and tele-vision and radio stations in Ohio covered theactivities of the Division during this week,which helped to further educate the public tomake wise and appropriate investment deci-sions through their coverage.

Distribution of Investor Educa-tional Video to Ohio Libraries

In April, the Division distributed anew investor education video to 200 Ohiolibraries. The videos, titled “InvestmentScams: What Con Artists Don’t Want YouTo Know” were provided to the Division bythe Investor Protection Trust, a non-profitorganization.

The 17-minute video explains howindividual investors can spot and avoid fraudand illustrates how fraud schemes work. Thenarrator is David Leisure, who first came tofame in the 1980s in a widely rememberedseries of advertisements featuring the “lyingcar salesman” Joe Isuzu. The video plays onthe viewer’s memory of the unscrupulous JoeIsuzu character in order to take the viewerinto the mindset of the con artist.

National Summit of RetirementIncome Savings

To coincide with the National Sum-mit of Retirement Income Savings at theWhite House, the Department of Com-merce issued a release in June encouragingOhioans to remember the basics of investing.Ohioans are encouraged to set realistic invest-ment expectations, diversify their portfoliosand recognize that all investments carry risks.

In addition, the Department of Com-merce issued a release announcing all the freeinvestor education materials available from

Investor Protection and Educationby Karen Terhune



Capital Formation StatisticsAmounts in Thousands (rounded up)

Filing Type Fourth Quarter 1998 YTD 1998

Exemptions

Form 3(Q) & Form D* $563,054 $3,105,141

Form 3(W) 19,254 77,126

Registrations

Form .06 8,299 654,601

Form .09 315,528 707,416

Form .091 2,473,366 9,011,274

Investment Companies

Definite 172,598 645,646

Indefinite** 689 filings = 689,000 2669 filings = 2,669,000

TOTAL $4,241,099 $16,870,204

*Reflects sales actually reported. Remaining categories reflect amount of securities registered or eligible to be sold in Ohio by issuers.**Investment companies may seek to sell an indefinite amount of securities by submitting maximum fees. Based on the maximum filing fee of $1100, an indefinitefiling represents the sale of a minimum of $1,000,000 worth of securities, with no maximum. For purposes of calculating an aggregate capital formation amount,each indefinite filing has been assigned a value of $1,000,000.

Because the Division's mission includes enhancing capital formation, the Division tabulates the aggregate dollaramount of securities to be sold in Ohio pursuant to filings made with the Division. As indicated in the notes tothe table, the aggregate dollar amount includes a value of $1,000,000 for each "indefinite" filing. However, thetable does not reflect the value of securities sold pursuant to "self-executing exemptions" like the "exchange listed"exemption in R.C. 1707.02(E) and the "limited offering" exemption in R.C. 1707.03(O). Nonetheless, theDivision believes that the statistics set out in the table are representative of the amount of capital formation takingplace in Ohio.

Editor's Note: The Division Enforcement SectionReports for the fourth quarter of 1998 will appear inthe next issue of the Ohio Securities Bulletin.


The following table sets forth the number of registration and exemption filings received by the Division during the fourth quarter of 1998,compared to the number of filings received during the fourth quarter of 1997. Likewise, the table compares the total for 1998 to the total for1997.

Registration Statistics

Licensing StatisticsThe table below sets out the number of Salesmen and Dealers licensed by the Division at the end of the first, second, third and fourthquarters of 1998, compared to the corresponding quarters of 1997.

*Includes 214 filings submitted on federal Form D for offerings made pursuant to Rule 506 of Regulation D. Use of the federal Form Dwas not available before April 21, 1997.

**The Form NF is a form adopted by the North American Securities Administrators Association, Inc. to be used by investment companiesin making notice filings. The form was drafted as a result of the National Securities Markets Improvement Act of 1996, and is used at theelection of the issuer. Usage of the Form NF began in 1997, with its usage increasing throughout the year.

End of Q4 End of Q4 End of Q3 End of Q3 End of Q2 End of Q2 End of Q1 End of Q11998 1997 1998 1997 1998 1997 1998 1997

89,152 83,238 88,796 83,545 85,526 82,135 81,210 80,289

2,137 2,170 2,151 2,154 2,106 2,113 2,082 2,050

Number ofSalespersons

Licensed:

Number ofDealers

Licensed:

Filing Type 4th Qtr ‘98 1998 4th Qtr ‘97 1997

1707.03(Q) 351 1502 381 1402

1707.03(W) 14 55 20 66

1707.04 0 0 0 0

1707.041 1 1 1 6

1707.06 36 126 25 147

1707.09 26 72 20 657

1707.091 80 346 120 1958

NF** 1036 4202 983 1690

1707.39 6 11 4 18

1707.391 25 114 28 129

Total 1575 6429 1582 6073

the Division of Securities. Former directorOwens announced “Through a wide varietyof investor education materials, we are edu-cating Ohioans on the risks, rewards andpotential pitfalls of the investment process.”

Investor Education NewspaperColumns

The Department of Commerce beganissuing an ongoing series of newspaper col-umns on investor educational topics. Theseinvestor education articles are suitable forcolumns, particularly in smaller weekly news-papers. In 1998, the following columns wereissued: (1) “Things to Remember WhenChoosing a Stockbroker”; (2) “It’s Time toStart Saving for Retirement”; and (3) “Be-ware of Investment ‘Opportunities’ by ThoseYou Know.” The Department will be peri-odically sending additional columns to Ohionewspapers.

1998 Ohio State Fair

The Division participated in August atthe 1998 Ohio State Fair by distributinginvestor education information. TheDivision’s new publications released during“Saving and Investor Education Week” weredistributed, along with its other investor edu-cation publications. Participation at the OhioState Fair allowed the Division to once againtarget educational efforts toward the largeattendee population.

Notepad for Investors

In November, the Department ofCommerce announced the availability of anew investor notepad, which prompts inves-tors to record information such as the date ofthe broker’s call, the nature of the invest-ment, how it was described to them, thebroker’s name and their CRD number.

The notepad consists of fifteen 8-1/2 x11 inch two-sided sheets that are printed innotepad fashion so investors get into thehabit of making written records of the con-versations with their brokers. The release

issued by the Department noted that inves-tors who take good notes and maintain theirrecords are much more likely to prevail if theylater have a dispute with their broker. Thenotepad form can also be downloaded fromthe Division’s Web site atwww.securities.state.oh.us.

Holiday Telephone Hotline Sticker

In December, Commissioner TomGeyer distributed a supply of telephonehotline stickers, printed in holiday colors ofred and green, to all Ohio County Prosecu-tors and Sheriffs. The Commissioner re-quested their assistance in distributing the“Investigate Before You Invest TelephoneReminder Sticker” during the holiday sea-son. Commissioner Geyer informed theprosecutors and sheriffs that “As the holidaysapproach, Ohio citizens need to be aware ofswindlers who use the telephone to promise‘can’t miss’ investment deals with ‘guaran-teed returns.’”

Ms. Terhune is the Assistant Manager of theDivision's Enforcement Section.

Investor Protection and EducationContinued from page 25

Ohio Division of Securities77 South High Street, Floor 22Columbus, Ohio 43215

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