Chapter DFI-Sec 5

DFI-Sec 5.03(1)(c) (c) A record showing all payments received, including date of receipt, purpose, and from whom received; and all disbursements, including date paid, purpose, and to whom made.

DFI-Sec 5.03(1)(d) (d) A record showing all receivables and payables.

DFI-Sec 5.03(1)(e) (e) All trial balances, financial statements, and internal audit working papers which may be prepared relating to the business of the investment adviser.

DFI-Sec 5.03(1)(f) (f) A memorandum of each order given by the investment adviser for the purchase or sale of any security, of any instruction received by the investment adviser from the client concerning the purchase, sale, receipt or delivery of a particular security, and of any modification or cancellation of any order or instruction. The memoranda shall show the terms and conditions of the order, instruction, modification or cancellation; shall identify the person connected with the investment adviser who recommended the transaction to the client and the person who placed the order; and shall show the account for which entered, the date of entry, and the bank, broker or dealer by or through whom executed. Orders entered pursuant to the exercise of discretionary power shall be so designated.

DFI-Sec 5.03(1)(g) (g) Copies of all written communications, correspondence, confirmations, appraisals and other records relating to investment activities of clients.

DFI-Sec 5.03(1)(h) (h) A separate file containing a copy of all complaints made or submitted by clients relating to investment activities for clients, and all investigative inquiries made by law enforcement and securities regulatory authorities to the investment adviser or its investment adviser representatives regarding their securities and investment advisory business, and containing evidence, including representative copies, of the responses made by the investment adviser and its investment adviser representatives to the complaint or investigation. In this paragraph, “complaint” means any written or oral statement of a client or any person acting on behalf of a client alleging a grievance involving the activities of persons under the control of the investment adviser in connection with providing investment advice or placing orders on behalf of clients.

DFI-Sec 5.03(1)(i) (i) A list or other record of all accounts in which the investment adviser is vested with any discretionary power with respect to the funds, securities or transactions of any client.

DFI-Sec 5.03(1)(j) (j) A copy of all powers of attorney and other evidences of the granting of any discretionary authority by any client to the investment adviser or to a third party.

DFI-Sec 5.03(1)(k) (k) A copy of all written agreements entered into by the investment adviser with any client, or with any other person if the agreement relates to the business of the investment adviser.

DFI-Sec 5.03(1)(L) (L) A file containing any advertisement (as defined within the meaning of section 206 (4)-1. of the investment advisers act of 1940) used in connection with the offering of the investment advisory services in this state.

DFI-Sec 5.03(1)(m) (m) A record or information demonstrating compliance with the net worth requirement in s. DFI-Sec 5.02.

DFI-Sec 5.03(1)(n) (n) A record that complies with Rule 204-2 (a) (12) under section 204 of the investment advisers act of 1940 containing information for all securities transactions effected for the account of the investment adviser or any of its employees subject to that rule, including the title and amount of the security involved, the date and nature of the transaction, the execution price, and information regarding client transactions in the same security.

DFI-Sec 5.03(1)(o) (o) A record of the initial offer and delivery, evidenced by the client’s written acknowledgement, as well as the annual offer or delivery, or both, to each client of the adviser’s brochure or other document used to comply with s. DFI-Sec 5.05 (8).

DFI-Sec 5.03(1)(p) (p)

DFI-Sec 5.03(1)(p)1. 1. A copy of each brochure and supplement and each amendment or revision to the brochure or supplement, given or sent to any client or prospective client of the investment adviser as required by s. DFI-Sec 5.05 (8);

DFI-Sec 5.03(1)(p)2. 2. A summary of material changes that are required by Part 2 of Form ADV, but are not contained in the brochure or supplement; and

DFI-Sec 5.03(1)(p)3. 3. A record of the dates that each brochure and supplement, each amendment or revision thereto, and each summary of material changes, was given or offered to any client or to any prospective client who subsequently becomes a client.

DFI-Sec 5.03(1)(q) (q) Copies bearing signatures of the investment adviser’s appropriate signatory and the investment adviser representative, of each initial Form U-4 and each amendment to the disclosure reporting pages of Form U-4. These documents shall be retained by the investment adviser who prepared the filing on behalf of the investment adviser representative.

DFI-Sec 5.03(2) (2) Each registered investment adviser who renders investment supervisory or management service to any client shall, with respect to the portfolio being supervised or managed and to the extent that the information is reasonably available to or obtainable by the investment adviser, maintain and keep current:

DFI-Sec 5.03(2)(a) (a) Records for each client showing the securities purchased or sold on advice of the adviser, and the date, amount, and price of each purchase and sale.

DFI-Sec 5.03(2)(b) (b) Records identifying the client and the current amount or interest owned by each client for each security in which any client has a current position.

DFI-Sec 5.03(2)(c) (c) Written information concerning a client’s net worth, annual income and other financial information, investment objectives and experience and such other information necessary and relied upon by the investment adviser to determine the suitability of any investment recommendation or investment advice to the client. The written information shall be updated when the investment adviser receives information from the client that results in material changes to the client’s annual income, net worth, investment objectives or other changes to information affecting the investment adviser’s ability to make suitable recommendations for the client as required under s. DFI-Sec 5.06 (4).

DFI-Sec 5.03(3) (3) Every registered investment adviser shall preserve for a period of not less than 5 years, the first 2 years in an easily accessible place, all records required under subs. (1) and (2) except that records respecting an account required under sub. (1) (i), (j) and (k) shall be preserved by the investment adviser for a period of not less than 5 years from the end of the first fiscal year during which the last entry was made on such record and records required under sub. (1) (a) shall be preserved by the investment adviser for a period of not less than 3 years after withdrawal or expiration of its registration in this state. The record may be retained by computer if a printed copy of the record can be prepared immediately upon request. In the event a record has been preserved for 2 years as required in this subsection, a microfilm copy may be substituted for the remainder of the required period.

DFI-Sec 5.03(4) (4) Every branch office as defined in s. DFI-Sec 1.02 (7), of a registered investment adviser whose principal office is in this state, shall prepare and keep current the records described in subs. (1) (c), (f), (g), (h), (k) and (L) and (2) (a), (b) and (c).

DFI-Sec 5.03(5) (5) The records required in sub. (4) shall be preserved at the branch office for a period of not less than 3 years, the first 2 years in an easily accessible place. Upon closing of the branch office, the records shall be transferred to the home office for the duration of the required retention period. The record may be retained by computer if a printed copy of the record can be prepared immediately upon request. If a record has been preserved for the first year of the 3-year period required in this subsection, a microfilm copy may be substituted for the remainder of the required retention period.

DFI-Sec 5.03(6) (6) The requirements of subs. (1) to (5) shall not apply to any investment adviser that has its principal office in a state other than this state, provided that the investment adviser is registered in that state and is in compliance with that state’s books and records requirements, if any.

DFI-Sec 5.03(7) (7) The division may by order exempt any investment adviser from all or part of the requirements of this section, either unconditionally or upon specified conditions, if by reason of the special nature of its business, the division finds that issuance of the order is necessary or appropriate in the public interest or for the protection of investors.

DFI-Sec 5.03 History History: Cr. Register, December, 1977, No. 264, eff. 1-1-78; r. and recr. (1), renum. (2) and (3) to be (3) and (4) and am., cr. (2), Register, December, 1980, No. 300, eff. 1-1-81; am. (3), Register, December, 1984, No. 348, eff. 1-1-85; am. (1) (h), Register, December, 1989, No. 408, eff. 1-1-90; am. (1) (intro.), renum. (4) to be (6), cr. (4) and (5), Register, December, 1991, No. 432, eff. 1-1-92; am. (1) (intro.), renum. (6) to be (7), cr. (6), Register, December, 1992, No. 444, eff. 1-1-93; am. (4), Register, December, 1994, No. 468, eff. 1-1-95; cr. (1) (m) and (n), Register, December, 1995, No. 480, eff. 1-1-96; am. (1) (intro.), renum. (2) to (5) and (7) to be (3) to (6) and (8) and am. (5) and (6), cr. (2) and (7), r. (6), Register, December, 1998, No. 516, eff. 1-1-99; cr. (1) (o), am. (5), Register, December, 1999, No. 528, eff. 1-1-00; am. (1) (h) and (5), renum. (1) (o) to be (3) (c) and am., cr. (1) (o), Register, December, 2000, No. 540, eff. 1-1-01; emerg. cr. (1) (p) and (q), eff. 1-1-01; CR 01-025: cr. (1) (p) and (q), Register, July, 2001, No. 547, eff. 8-1-01; CR 04-074: r. (2), renum. (3) to (8) to be (2) to (7) Register December 2004 No. 588, eff. 1-1-05; correction in (4) made under s. 13.93 (2m) (b) 7., Stats., Register December 2004 No. 588; CR 08-077: am. (1) (intro.), (f) to (k), (m) to (o) and (2) to (6) Register December 2008 No. 636, eff. 1-1-09; correction in (4) made under s. 13.92 (4) (b) 7., Stats., Register December 2008 No. 636.

DFI-Sec 5.035 DFI-Sec 5.035 Investment advisors with custody.

DFI-Sec 5.035(1) (1) Except as provided in sub. (2), and subject to the definitions in sub. (4), it shall be a prohibited business practice for an investment adviser registered, or required to be registered, to have custody of client funds or securities unless the investment adviser complies with all of the following:

DFI-Sec 5.035(1)(a) (a) The investment adviser notifies the division promptly in writing on Form ADV that the investment adviser has or may have custody.

DFI-Sec 5.035 Note Note: Form ADV is available online at the website of the Investment Adviser Registration Depository, www.iard.com, and may be filled out and submitted electronically.

DFI-Sec 5.035(1)(b) (b) A qualified custodian maintains the funds and securities in a separate account for each client under that client’s name or in accounts that contain only client funds and securities, under the investment adviser’s name as agent or trustee for the clients.

DFI-Sec 5.035(1)(c) (c) When an investment adviser opens an account with a qualified custodian on a 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 when the account is opened and following any changes to this information.

DFI-Sec 5.035(1)(d) (d) Account statements shall be sent to clients in compliance with one of the following:

DFI-Sec 5.035(1)(d)1. 1. If client funds or securities are held 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 client for which it maintains funds or securities, identifying the amount of funds and of each security in the account at the end of the period and setting forth all transactions in the account during that period.

DFI-Sec 5.035(1)(d)2. 2. If client funds or securities are held by the adviser:

DFI-Sec 5.035(1)(d)2.a. a. 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; and

DFI-Sec 5.035(1)(d)2.b. b. The investment adviser shall engage an independent certified public accountant to 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 adviser and that is irregular from year to year. The accountant shall file a copy of the special examination report with the division within 30 days after the completion of the examination, stating that it has examined the funds and securities and describing the nature and extent of the examination; and

DFI-Sec 5.035(1)(d)2.c. c. Within one business day of the finding of any material discrepancies identified during the course of the examination under subd. 2. b., the accountant shall notify the division of the discrepancy by means of a facsimile transmission or electronic mail, followed by first class mail, directed to the division.

DFI-Sec 5.035(1)(d)3. 3. If the investment adviser is a general partner of a limited partnership, is a managing member of a limited liability company, or holds a comparable position for another type of pooled investment vehicle, the account statements required under par. (d) 1. or 2. a., shall be sent to each limited partner, member or other beneficial owner or their independent representative.

DFI-Sec 5.035(1)(e) (e) If a client does not receive account statements and notices directly from the adviser or custodian, the investment adviser shall obtain from the client a written designation of an independent representative to receive, on the client’s behalf, notices and account statements as required under pars. (c) and (d).

DFI-Sec 5.035(1)(f) (f) An adviser who has custody as defined in sub. (4) (a) as a result of having fees directly deducted from client accounts, as described in sub. (4) (a) 2., shall comply with all of the following:

DFI-Sec 5.035(1)(f)1. 1. The adviser shall obtain written authorization from the client to deduct advisory fees from the account held with the qualified custodian.

DFI-Sec 5.035(1)(f)2. 2. Except as provided in subd. 4., each time a fee is directly deducted from a client account, the adviser shall concurrently do both of the following:

DFI-Sec 5.035(1)(f)2.a. a. Send the qualified custodian notice of the amount of the fee to be deducted from the client’s account; and

DFI-Sec 5.035(1)(f)2.b. b. Send the client an invoice itemizing the fee. Itemization includes the formula used to calculate the fee, the amount of assets under management the fee is based on, and the time period covered by the fee.

DFI-Sec 5.035(1)(f)3. 3. The investment adviser notifies the division on Form ADV that the investment adviser intends to comply with subds. 1. and 2.

DFI-Sec 5.035(1)(f)4. 4. An investment adviser having custody as described in sub. (4) (a) 2. and who complies with the safekeeping requirements in pars. (a) through (f), is not required to meet the financial requirements for custodial advisers prescribed in s. DFI-Sec 5.02 (2).

DFI-Sec 5.035(1)(g) (g) An investment adviser who has custody as described in sub. (4) (a) 3. and who does not meet the exception provided under sub. (2) (c) shall comply with each of the following:

DFI-Sec 5.035(1)(g)1. 1. The investment adviser shall hire an independent party as defined in sub. (4) (b) to review all fees, expenses and capital withdrawals from the pooled accounts.

DFI-Sec 5.035(1)(g)2. 2. The investment adviser shall send all invoices or receipts to the independent party, detailing the amount of the fee, expenses or capital withdrawal, and the method of calculation so that the independent party can do both of the following:

DFI-Sec 5.035(1)(g)2.a. a. Determine that the payment is in accordance with the pooled investment vehicle standards set forth in the partnership agreement or membership agreement.

DFI-Sec 5.035(1)(g)2.b. b. Forward to the qualified custodian, written approval for payment of the fee, expense or capital withdrawal, and provide a copy to the investment adviser.

DFI-Sec 5.035(1)(g)3. 3. The investment adviser shall notify the division on Form ADV that the investment adviser intends to comply with subds. 1. and 2.

DFI-Sec 5.035(1)(g)4. 4. An investment adviser having custody as described in sub. (4) (a) 3. and who complies with the safekeeping requirements in pars. (a) through (e), together with the requirements in par. (g), will not be required to meet the financial requirements for custodial advisers prescribed in s. DFI-Sec 5.02 (2).

DFI-Sec 5.035(2) (2) 

DFI-Sec 5.035(2)(a) (a) With respect to shares of an open-end investment company as defined in section 5 (a) (1) of the investment company act of 1940, an investment adviser may use the investment company’s transfer agent in lieu of a qualified custodian for purposes of complying with sub. (1).

DFI-Sec 5.035(2)(b) (b)

DFI-Sec 5.035(2)(b)1. 1. An investment adviser is not required to comply with sub. (1) with respect to securities that meet all of the following requirements:

DFI-Sec 5.035(2)(b)1.a. a. The securities are acquired from the issuer in a transaction or series of transactions not involving a public offering.

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

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

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

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

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

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

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

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

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

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

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

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

DFI-Sec 5.035(3) (3) 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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