HAR §16-39-435. Application

(a) Except as permitted by section 16 39 430(f), an application for registration shall be filed on Form ADV through the IARD and shall contain the information requested therein concerning the applicant's identification, qualification, business association, history, experience, and financial condition. (b) The application shall be filed together with the following: (1) The application fee set forth in section 16- 39-103; (2) Evidence of compliance with all applicable requirements of section 16-39-432(d) to (g); (3) Financial statements consisting of either: (A) A balance sheet as of a date within thirty calendar days of filing, verified by a duly authorized officer, or the equivalent, of the applicant and notarized, or if the applicant has been engaged in business one year or more preceding, an audited financial statement as of the last fiscal year, together with a balance sheet as of a date within thirty calendar days of filing, verified by a duly authorized officer, or the equivalent, of the applicant and notarized. However, if the applicant does not have custody or discretionary authority over client funds, the adviser need only file financial statements verified by a duly authorized officer, or the equivalent, of the applicant and notarized; or (B) If the investment adviser maintains its principal place of business in a state other than this State, and if the investment adviser is registered in the other state and is in compliance with the other state's financial reporting requirements, if any, a copy of the adviser's most recent financial §16-39-435 39-71 statement filed with the state where the adviser maintains its principal place of business; and (4) Proof that the applicant, if an individual, has complied with the examination requirement provided in section 16-39-438, or otherwise qualifies for exemption from the examination as specified in section 16 39-438. (c) The commissioner may also require additional information regarding the applicant's previous history, record, and association, including without limitation the following: (1) Disclosure of any injunction or administrative order or conviction of a misdemeanor involving a security or any aspect of the securities business, and any conviction of a felony; (2) The applicant's financial condition and history; (3) Disclosure as to whether the investment adviser, or any person employed by or associated in business with the investment adviser, is subject to any disqualification which would be a basis for denial, suspension, or revocation of registration of the investment adviser under section 485A- 412, HRS; and (4) Any other information that the commissioner deems necessary to establish the applicant's qualifications. (d) Additional exhibits or information not specifically required by the application may be submitted by the applicant. (e) The commissioner may require the applicant to file additional information if such information is necessary for the commissioner to determine whether to approve or deny the application. In accordance with the provisions of section 16-39-105, any additional information requested by the commissioner shall be requested by the commissioner in writing within forty- five calendar days of receipt of the application. §16-39-435 39-72 (f) An application for initial registration shall not be considered filed until the required fee and all required submissions have been received by the commissioner. [Eff 6/30/08; comp 11/18/23] (Auth: HRS §§485A-403, 485A-406, 485A-410, 485A-411, 485A- 606) (Imp: HRS §§485A-403, 485A-406, 485A-410, 485A- 411) §16-39-436 Custody of client funds or securities by investment advisers. (a) Safekeeping required. It shall be unlawful and deemed to be a fraudulent, deceptive, or manipulative act, practice, or course of business for an investment adviser that is registered or required to be registered to have custody of client funds or securities unless: (1) Notice to commissioner. The investment adviser shall notify the commissioner promptly in writing that the investment adviser has or may have custody. Such notification is also required to be given on Form ADV through the IARD; (2) Qualified custodian. A qualified custodian maintains those funds and securities: (A) In a separate account for each client under that client's name; or (B) In accounts that contain only the client's funds and securities, under the investment adviser's name as agent or trustee for the client; (3) Notice to clients. If the investment adviser opens an account with a qualified custodian on the client's behalf, either under the client's name or under the investment adviser's name as agent, the investment adviser shall notify the client in writing of the qualified custodian's name, address, and the manner in which the funds or securities are maintained, promptly §16-39-436 39-73 when the account is opened and following any changes to this information; (4) Account statements shall be sent to clients, either: (A) By a qualified custodian. The investment adviser shall have a reasonable basis for believing that the qualified custodian sends an account statement, at least quarterly, to each of the investment adviser's clients for which it maintains funds or securities, identifying the amount of funds and of each security in the account at the end of the period and setting forth all transactions in the account during that period; or (B) By the investment adviser. (i) The investment adviser shall send an account statement, at least quarterly, to each client for whom the investment adviser has custody of funds or securities, identifying the amount of funds and of each security of which the investment adviser has custody at the end of the period and setting forth all transactions during that period; (ii) An independent certified public accountant shall verify all client funds and securities by actual examination at least once during each calendar year at a time chosen by the accountant without prior notice or announcement to the investment adviser and that is irregular from year to year, and shall file a copy of the auditors report and financial statements with the commissioner within §16-39-436 39-74 thirty calendar days after the completion of the examination, along with a letter stating that it has examined the funds and securities and describing the nature and extent of the examination, and (iii) The independent certified public accountant, upon finding any material discrepancies during the course of the examination, shall notify the commissioner of the discrepancies within one business day of the finding, by means of a facsimile transmission or electronic mail, followed by first class mail, directed to the attention of the commissioner; (C) Special rule for limited partnerships and limited liability companies. If the investment adviser is a general partner of a limited partnership or managing member of a limited liability company, or holds a comparable position for another type of pooled investment vehicle, the account statements required under paragraph (4) shall be sent to each limited partner or member, or other beneficial owner or their independent representative; (5) Independent representatives. A client may designate an independent representative to receive, on the client's behalf, notices and account statements as required under paragraphs (3) and (4); (6) Direct fee deduction. An investment adviser who has custody by having the authority to deduct fees directly deducted from client accounts shall provide the following safeguards: §16-39-436 39-75 (A) Written authorization. The investment adviser shall have written authorization from the client to deduct advisory fees from the account held with the qualified custodian; (B) Notice of fee deduction. Each time a fee is directly deducted from a client account, the investment adviser shall concurrently: (i) Send the qualified custodian an invoice of the amount of the fee to be deducted from the client's account; and (ii) Send the client an invoice itemizing the fee. Such itemization shall include the formula used to calculate the fee, the amount of assets under management the fee is based on, and the time period covered by the fee; (C) Notice of safeguards. The investment adviser shall notify the commissioner in writing that the investment adviser intends to use the safeguards required under this section. Such notification shall be given on Form ADV; (D) Waiver of net worth, bonding and audited financial statement requirements. An investment adviser having custody solely because the investment adviser meets the definition of custody as defined under this section and who complies with the safekeeping requirements in paragraphs (1) through (6) shall not be required to meet the financial requirements for an investment adviser with custody as provided in section 16-39-433, the bonding requirement set forth in section 16-39-434, and the audited §16-39-436 39-76 financial statement requirement set forth in section 16-39-437; (7) Pooled investments. An investment adviser to pooled investment vehicles who has custody and who does not meet the exception provided in subsection (b)(3) shall, in addition to the safeguards set forth in paragraphs (1) through (5), comply with the following: (A) Engage an independent party. Hire an independent party to review all fees, expenses, and capital withdrawals from the pooled investment accounts; (B) Review of fees. Send all invoices or receipts to the independent party, detailing the amount of the fee, expenses or capital withdrawal, and the method of calculation such that the independent party can: (i) Determine that the payment is in accordance with the pooled investment vehicle standards (generally, the partnership agreement or membership agreement); and (ii) Forward, to the qualified custodian, approval for payment of the invoice with a copy to the investment adviser; (C) For purposes of this section, an "independent party" means a person that: (i) Is engaged by the investment adviser to act as a gatekeeper for the payment of fees, expenses, and capital withdrawals from the pooled investment; (ii) Does not control and is not controlled by, and is not under common control with the investment adviser; and §16-39-436 39-77 (iii) Does not have, and has not had within the past two years, a material business relationship with the investment adviser; (D) Notice of safeguards. The investment adviser shall notify the commissioner in writing that the investment adviser intends to use the safeguards required under this section. The notification shall be given on Form ADV; (E) Waiver of net worth, bonding and audited financial statement requirements. An investment adviser having custody solely because the investment adviser meets the definition of custody as defined under this section and who complies with the safekeeping requirements in paragraphs (1) through (5) and (7) shall not be required to meet the financial requirements for an investment adviser with custody as provided in section 16- 39-433, the bonding requirement set forth in section 16-39-434, and the audited financial statement requirement set forth in section 16-39-437; (8) Investment adviser or investment adviser representative as trustee. When a trust retains an investment adviser, investment adviser representative, or employee, director, or owner of an investment adviser as trustee and the investment adviser acts as the investment adviser to that trust, the investment adviser shall: (A) Notify the commissioner in writing that the investment adviser intends to use the safeguards required under this section. The notification shall be given on Form ADV; (B) Send to the grantor of the trust, the attorney for the trust if it is a §16-39-436 39-78 testamentary trust, the co-trustee (other than the investment adviser, investment adviser representative, or employee, director, or owner of the investment adviser); or a defined beneficiary of the trust, at the same time that it sends any invoice to the qualified custodian, an invoice showing the amount of the trustees' fee or investment management or advisory fee, the value of the assets on which the fees were based, and the specific manner in which the fees were calculated; (C) Enter into a written agreement with a qualified custodian which specifies: (i) That the qualified custodian shall not deliver trust securities to the investment adviser, any investment adviser representative or employee, director, or owner of the investment adviser; nor transmit any funds to the investment adviser, any investment adviser representative or employee, director or owner of the investment adviser, except that the qualified custodian may pay trustee fees to the trustee and investment management or advisory fees to investment adviser; provided that: (A) The grantor of the trust or attorneys for the trust, if it is a testamentary trust, the co trustee (other than the investment adviser, investment adviser representative, or employee, director, or owner of the investment adviser); or a §16-39-436 39-79 defined beneficiary of the trust has authorized the qualified custodian in writing to pay those fees; (B) The statements for those fees show the amount of the fees for the trustee and, in the case of statements for investment management or advisory fees, show the value of the trust assets on which the fee is based and the manner in which the fee was calculated; and (C) The qualified custodian agrees to send to the grantor of the trust, the attorneys for a testamentary trust, the co-trustee (other than the investment adviser, investment adviser representative, or employee, director or owner of the investment adviser); or a defined beneficiary of the trust, at least quarterly, a statement of all disbursements from the account of the trust, including the amount of investment management fees paid to the investment adviser and the amount of trustees' fees paid to the trustee; (ii) Except as otherwise set forth below in subparagraph (8)(C)(ii)(A), the qualified custodian may transfer funds or securities, or both, of the trust only upon the direction of the trustee (who may be the §16-39-436 39-80 investment adviser, investment adviser representative, or employee, director, or owner of the investment adviser), who the investment adviser has duly accepted as an authorized signatory. The grantor of the trust or attorneys for the trust, if it is a testamentary trust, the co-trustee (other than the investment adviser, investment adviser representative, or employee, director, or owner of the investment adviser); or a defined beneficiary of the trust, shall designate the authorized signatory for management of the trust. The direction to transfer funds or securities, or both, can only be made to the following: (A) A trust company, bank trust department or brokerage firm independent of the investment adviser for the account of the trust to which the assets relate; (B) The named grantors or to the named beneficiaries of the trust; (C) A third person who is independent of the investment adviser with respect to payment of the fees or charges of the third person including, but not limited to: attorney's, accountant's, or qualified custodian's fees for the trust; and taxes, interest, maintenance or other expenses, if there is property other than §16-39-436 39-81 securities or cash owned by the trust; (D) Third persons independent of the investment adviser for any other purpose legitimately associated with the management of the trust; or (E) A broker-dealer in the normal course of portfolio purchases and sales; provided that the transfer is made on payment against delivery basis or payment against trust receipt; (D) Waiver of net worth, bonding and audited financial statement requirements. An investment adviser having custody solely because the investment adviser meets the definition of custody as defined under this section and who complies with the safekeeping requirements in paragraphs (1) through (5) and (8) shall not be required to meet the financial requirements for an investment adviser with custody as provided in section 16- 39-433, the bonding requirement set forth in section 16 39-434 and the audited financial statement requirement set forth in section 16-39-437. (b) Exceptions. (1) Shares of mutual funds. With respect to shares of an open-end company as defined in section 5(a)(1) of the Investment Company Act ("mutual fund"), the investment adviser may use the mutual fund's transfer agent in lieu of a qualified custodian for purposes of complying with the requirements of subsection (a); (2) Certain privately offered securities. §16-39-436 39-82 (A) An investment adviser shall not be required to comply with the requirements of subsection (a) with respect to securities that are: (i) Acquired from the issuer in a transaction or chain of transactions not involving any public offering; (ii) Uncertificated, and ownership thereof is recorded only on books of the issuer or its transfer agent in the name of the client; and (iii) Transferable only with prior consent of the issuer or holders of the outstanding securities of the issuer. (B) Notwithstanding subparagraph (A), the provisions of paragraph (2) are available with respect to securities held for the account of a limited partnership (or limited liability company, or other type of pooled investment vehicle) only if the limited partnership is audited, the audited financial statements are distributed, as described in paragraph (3) and the investment adviser notifies the commissioner in writing that the investment adviser intends to provide audited financial statements, as described above. The notification shall be given on Form ADV; (3) Limited partnerships subject to annual audit. An investment adviser shall not be required to comply with paragraph (4) with respect to the account of a limited partnership (or limited liability company, or another type of pooled investment vehicle) that is subject to audit at least annually and distributes its audited §16-39-436 39-83 financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) within one hundred twenty calendar days after the end of its fiscal year. The investment adviser shall also notify the commissioner in writing that the investment adviser intends to employ the use of the audit safeguards described above. The notification is required to be given on Form ADV; (4) Registered investment companies. The investment adviser shall not be required to comply with this section with respect to the account of an investment company registered under the Investment Company Act; (5) Beneficial trusts. The investment adviser shall not be required to comply with safekeeping requirements of subsection (a) or the net worth requirement set forth in section 16-39-433 and the bonding requirements set forth in section 16 39 434 if the investment adviser has custody solely because the investment adviser, investment adviser representative, or employee, director, or owner of the investment adviser is a trustee for a beneficial trust, if all of the following conditions are met for each trust: (A) The beneficial owner of the trust is a parent, grandparent, spouse, sibling, child, or grandchild of the trustee. These relationships shall include "step" relationships. (B) For each account under subparagraph (A), the investment adviser shall comply with the following: (i) The investment adviser shall provide a written statement to each beneficial owner of the account setting forth a §16-39-436 39-84 description of the requirements of subsection (a) and the reasons why the investment adviser will not be complying with those requirements; (ii) The investment adviser obtains from each beneficial owner a signed and dated statement acknowledging the receipt of the written statement required under clause (i); and (iii) The investment adviser maintains a copy of both documents described in clauses (i) and (ii) until the account is closed or the investment adviser is no longer the trustee; (6) Any investment adviser who intends to have custody of client funds or securities but is not able to utilize a qualified custodian as defined in subsection (c) shall first obtain approval from the commissioner and shall comply with all of the applicable safekeeping provisions under subsection (a), including taking responsibility for those provisions that are designated to be performed by a qualified custodian. (c) Definitions. For purposes of this section: "Custody" means holding directly or indirectly, client funds or securities, or having any authority to obtain possession of them. Custody includes: (1) Possession of client funds or securities unless received inadvertently and returned to the sender promptly, but in any case within three business days of receiving them; (2) Any arrangement (including a general power of attorney) under which the investment adviser is authorized or permitted to withdraw client funds or securities maintained with a custodian upon the §16-39-436 39-85 investment adviser's instruction to the custodian; and (3) Any capacity (such as general partner or a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives the investment adviser or investment adviser's supervised person legal ownership of or access to client funds or securities; Receipt of checks or securities drawn by clients and made payable to unrelated third parties shall not meet the definition of custody if forwarded to the third party within twenty-four hours of receipt and the adviser maintains the records required under section 16-39-442; "Independent representative" means a person who: (1) Acts as an agent for an advisory client, including in the case of a pooled investment vehicle, for limited partners of a limited partnership, members of a limited liability company, or other beneficial owners of another type of pooled investment vehicle and by law or contract is obligated to act in the best interest of the advisory client or the limited partners, members, or other beneficial owners; (2) Does not control, is not controlled by, and is not under common control with the investment adviser; and (3) Does not have, and has not had within the past two years, a material business relationship with the investment adviser. "Qualified custodian" means the following independent institutions or entities that are not affiliated with the investment adviser by any direct or indirect common control and have not had a material business relationship with the adviser in the previous two years: §16-39-436 39-86 (1) A bank or savings association that has deposits insured by the FDIC under the Federal Deposit Insurance Act; (2) A registered broker-dealer holding the client assets in customer accounts; (3) A registered futures commission merchant registered under section 4f(a) of the Commodity Exchange Act, holding the client assets in customer accounts, but only with respect to clients' funds and security futures, or other securities incidental to transactions in contracts for the purchase or sale of a commodity for future delivery and options thereon; and (4) A foreign financial institution that customarily holds financial assets for its customers, provided that the foreign financial institution keeps the advisory clients' assets in customer accounts segregated from its proprietary assets. [Eff 6/30/08; am and comp 11/18/23] (Auth: HRS §§485A-411, 485A-606) (Imp: HRS §485A- 411) §16-39-437 Annual financial reporting requirements. (a) Every registered investment adviser shall file an annual report within ninety calendar days following the end of the investment adviser's fiscal year as follows: (1) An investment adviser that maintains its principal place of business in this State shall file audited financial statements; however, if an investment adviser does not have custody or discretionary authority over client funds, the investment adviser shall file financial statements verified by a duly authorized officer, or the equivalent, of the investment adviser and notarized. Any statement that does not adequately reflect §16-39-437 39-87 the applicant's true financial picture shall not be accepted; and (2) An investment adviser that maintains its principal place of business in a state other than this State shall file with the commissioner a copy of the most recent financial report or statement, if any, that the investment adviser has filed with the securities commissioner in the state in which it maintains its principal place of business. An investment adviser that maintains its principal place of business in a state other than this State but that is not registered in the state in which it maintains its principal place of business or is not in compliance with that state's financial reporting requirements, if any, shall be required to file with the commissioner financial statements that comply with the requirements of paragraph (1). (b) Except as otherwise provided in subsection (d), each registered investment adviser shall have at all times a minimum net worth specified in section 16- 39-433. (c) To ensure the investment adviser's compliance with section 16-39-433 and this section, the commissioner may require that the value of unsecured notes, accounts receivable, or advanced commissions due from an agent, officer, director, partner, or affiliate be substantiated by an opinion of a bank, finance company, or other lending institution satisfactory to the commissioner. (d) The provisions of subsections (b) and (c) shall not apply to an investment adviser that maintains its principal place of business in another state; provided that the investment adviser is registered in the state where it maintains its principal place of business and is in compliance with that state's net worth or net capital requirements, if any. [Eff 6/30/08; am and comp 11/18/23] §16-39-437 39-88 (Auth: HRS §§ 485A-411, 485A-606) (Imp: HRS §485A- 411)