Washington State Department of Financial Institutions

Securities Act Interpretive Statements

Table of Contents

Statement Topic
IS-01 RCW 21.20.333 - Consent to Service of Process
IS-03 RCW 21.20.310(3) - Securities Issued by Domestic Branches of Foreign Banks
IS-04 RCW 21.20.310(3) and .310(4) - Applicability to Mutual and Stock Savings Banks
IS-05 RCW 21.20.310 - Exempt Securities that are Guaranteed
IS-06 RCW 21.20.310(10) - Employee Benefit Plans - Permitted Beneficiaries - Acceleration of Effectiveness - Late Filing - Subsequent Distributions of Securities
IS-07 RCW 21.20.310(11) - Nonprofit Organization Exemption Disclosure Requirements
IS-09 RCW 21.20.320(1) - Nonpublic Offerings and Isolated Transactions - General Partnerships as Purchasers
IS-10 IRA's and Keoghs as "Pension Trusts"
RCW 21.20.320(8) - Exempt Transactions
RCW 21.20.005(3)(b) - Defining "Broker-Dealer"
RCW 21.20.005(6)(g)(i) - Defining "Investment Adviser
IS-11 RCW 21.20.320(8) - Exemptions - "Institutional Buyer"
IS-12 RCW 21.20.320(11) - Offers to Holders of Transferable Warrants
IS-13 RCW 21.20.320(11) - Offers or Sales to Existing Securities Holders - Applicability in Parent/Subsidiary Situations
IS-14 RCW 21.20.320(11) - Offers to Existing Security Holders of the Issuer - Applicability to Mutual Funds
IS-16 RCW 21.20.320(3), WAC 460-21B-060(22), WAC 460-22B-090(18) - Unsolicited Orders
IS-20 RCW 21.20.320(10) - Preorganization Certificates
IS-21 RCW 21.20.020 -Unlawful acts of persons advertising another.
WAC 460-24A-100 - Advertisements by investment advisers.
IS-22 RCW 21.20.040 and 005(6) – Investment Adviser Fee Sharing - Credit Unions and other unlicensed persons.

Note: Interpretive statements that have been repealed have been removed.

Topical Index

Topic Statement
Advertising - Performance standards in Advertisements IS-21
Banks - Mutual and Stock Savings Banks - Exemption IS-04
Banks - Securities Issued by Domestic Branches of Foreign Banks - Exemption IS-03
Broker-Dealer - Unsolicited Orders - Exemption IS-16
Churches and Other Nonprofit Organizations - Exempt Securities Offerings IS-07
Consent to Service of Process IS-01
Consulting Fees - Underwriters Compensation IS-02
Credit Unions IS-22
Definitions - Employee Benefit Plan IS-06
Definitions - Institutional Buyer IS-11
Definitions - Unsolicited Order IS-16
Employee Benefit Plans IS-06
Exemptions - Churches - RCW 21.20.310(11) IS-07
Exemptions - Domestic Branches of Foreign Banks - RCW 21.20.310(3) IS-03
Exemptions - Employee Benefit Plans - RCW 21.20.310(10) IS-06
Exemptions - Existing Security Holders - Transferable Warrants - RCW 21.20.320(11) IS-12
Exemptions - Existing Security Holders - Parent/Subsidiary Situations - RCW 21.20.320(11) IS-13
Exemptions - Existing Security Holders - Mutual Fund Families - RCW 21.20.320(11) IS-14
Exemptions - Guarantees IS-05
Exemptions - Institutional Buyer - RCW 21.20.320(8) IS-11
Exemptions - Nonprofit Organizations - RCW 21.20.310(11) IS-07
Exemptions - Preorganization Certificates - RCW 21.20.320(10) IS-20
Exemptions - Unsolicited Orders - RCW 21.20.320(3) IS-16
General Partnerships - As Purchasers of Exempt Securities IS-09
Governmental Securities - Guarantees of IS-05
Guarantees of Exempt Securities IS-05
Institutional Buyer Exemption - RCW 21.20.320(8) IS-11
Investment Adviser Fee Sharing IS-22
IRA's as "Pension Trusts" IS-10
Keogh Plans as "Pension Trusts" IS-10
Letters of Credit - Guarantees of Exempt Securities IS-05
Mutual Funds - Transactions Among Funds in a Family IS-14
NonProfit Organizations - Exemption Under RCW 21.20.310(11) IS-07
North American Securities Administrators Association (NASAA) IS-07
Partnerships - General Partnerships as Purchasers of Securities IS-09
Pension Trusts - IRA's and Keoghs IS-10
Preorganization Certificate Exemption IS-20
Retirement Plans - Employee Benefit Plans IS-06
Retirement Plans - IRA's and Keoghs as "Pension Trusts" IS-10
Service of Process - Filing of Consent IS-01
Transferable Warrants Under RCW 21.20.320(11) IS-12
Unsolicited Orders IS-16
Warrants IS-12

Citations

Citation Where Found Topic
RCW's
21.20.005(3)(b) IS - 10 IRS's and Keoghs as "Pension Trusts"
21.20.005(4) IS - 05 Exempt Securities that are Guaranteed
21.20.005(g)(i) IS - 10 IRA's and Keoghs as "Pension Trusts"
21.20.005(6) IS - 22 Investment Adviser Fee Sharing
21.20.010 IS - 07 Nonprofit Organization Disclosure Requirements
21.20.020 IS - 21 Performance standards in Advertisements
21.20.040 IS - 22 Investment Adviser Fee Sharing
21.20.310 IS - 05 Exempt Securities that are Guaranteed
21.20.310(3) IS - 03 Exemption for Securities Issued by Domestic Branches of Foreign Banks
21.20.310(3) IS - 04 Savings Bank Exemption
21.20.310(4) IS - 04 Savings Bank Exemption
21.20.310(10) IS - 06 Employee Benefit Plan Exemption
21.20.310(11) IS - 07 Nonprofit Organization Exemption
21.20.320(1) IS - 09 General Partnerships as Purchasers
21.20.320(3) IS - 16 Unsolicited Orders
21.20.320(8) IS - 11 Institutional Buyer Defined
21.20.320(10) IS - 20 Preorganization Certificates
21.20.320(11) IS - 12 Applicability of Exemption for Offers to Holders of Transferable Warrants
21.20.320(11) IS - 13 Applicability of Exemption to Parent/Subsidiary Situations
21.20.320(11) IS - 14 Applicability of Exemption to Mutual Fund Families
21.20.330 IS - 01 Consent to Service of Process
21.20.530 IS - 09 Non-Issuance of No-Action Letters Under RCW 21.20.320(1)
WAC's 460-
21B-060(22) IS - 16 Unsolicited Orders
22B-090(18) IS - 16 Unsolicited Orders
24A-100 IS - 21 Advertisements by investment advisers
Other Citations Securities and Exchange Commission
3(a)(2)1933 Act IS - 03 Exemption for Securities Issued by Domestic Branches of Foreign Banks
4(2) 1933 Act IS - 09 RCW 21.20.320(1) Exemptions - Nonpublic Offerings
Release No. 33-6661 IS - 03 Exemption for Securities Issued by Domestic Branches of Foreign Banks
Rule 405, 1933 Act IS - 06 Employee Benefit Plans - Definition
17 CFR 231.6661 IS - 03 Exemption for Securities Issued by Domestic Branches of Foreign Banks
Uniform Securities Act (1956)
National Securities Markets Improvement Act of 1996
NASAA Reports North American Securities Administrators Association
No. 1001 IS - 07 Nonprofit Organization Exemption Disclosure Requirements
Uniform Securities Act (1956)
402(b)(8) IS - 10 IRA's and Keoghs as "Pension Trusts"
402(b)(10) IS - 20 Preorganization Certificates

SECURITIES ACT INTERPRETIVE STATEMENT-01

RE: RCW 21.20.330 - CONSENT TO SERVICE OF PROCESS

Question Presented:

Must issuers of exempt securities file a consent to service of process?

Statute:

RCW 21.20.330 provides that:

Every applicant for registration as a broker-dealer, investment adviser, investment adviser representative, or salesperson under this chapter and every issuer that files an application to register or files a claim of exemption from registration to offer a security in this state through any person acting on an agency basis in the common law sense shall file with the director or with such person as the director may by rule or order designate, in such form as the director by rule prescribes, an irrevocable consent appointing the director or the director's successor in office to be the attorney of the applicant to receive service of any lawful process. . . .

Discussion and Conclusion:

RCW 21.20.330 was amended by the Legislature in 1994. As a result of the amendment, an issuer relying on a self-executing exemption from registration no longer is required to file a consent to service of process with the Securities Division. However, an issuer that files a permissive or required claim of exemption must file a consent.

Adopted: January 1, 1991; As amended May 31, 1996
Replaces: Statement of Policy 83-18
Deborah R. Bortner, Securities Administrator
Prepared by: Janet So and Nelda Shannon, Securities Examiners

 


SECURITIES ACT INTERPRETIVE STATEMENT-03

RE: RCW 21.20.310(3)- SECURITIES ISSUED BY DOMESTIC BRANCHES OF FOREIGN BANKS

Question Presented:

Are the securities of domestic branches of foreign banks exempt under RCW 21.20.310(3)?

Statute:

RCW 21.20.310 provides that securities exempt from registration shall include:

Discussion:

The Securities And Exchange Commission has said that domestic branches of foreign banks that are subject to regulation substantially equivalent to that of federally- or state-chartered domestic banks doing business within the same jurisdiction will qualify for the bank securities exemption set forth in Section 3(a)(2) of the Securities Act of 1933. (See 17 CFR 231.6661) The majority of the states have also followed this position. (See CCH Blue Sky L. Rep. 36,513 (1986).) As explained in SEC Release No. 33-6661 (1986), permitting domestic branches of foreign banks to qualify for the bank exemption will implement "the principle of parity of treatment between foreign and domestic banks in like circumstances."

Conclusion:

The securities of domestic branches of foreign banks that are subject to regulation that is substantially equivalent to that applicable to federally - or state-chartered domestic banks doing business within the same jurisdiction are included within the exemption from registration provided in RCW 21.20.310(3).

Adopted: January 1, 1991
Replaces: Interpretive Statement No. 89-1
Jack L. Beyers, Securities Administrator
Prepared by: Janet G. McKinney, Securities Examiner

 


SECURITIES ACT INTERPRETIVE STATEMENT-04

RE: RCW 21.20.310(3), .310(4) - APPLICABILITY TO MUTUAL AND STOCK SAVINGS BANKS

Question presented:

Are the bank and savings and loan exemptions found in RCW 21.20.310(3) and .310(4) available for securities issued or guaranteed by mutual or stock savings banks?

Statute:

RCW 21.20.310(3) exempts from registration "any security issued by . . . or guaranteed by, any bank organized under the laws of the United States, or any bank or trust company organized under the laws of any state and authorized to do business in this state." RCW 21.20.310(4) provides a similar exemption for securities issued or guaranteed by federal or state savings and loans.

Discussion:

RCW 21.20.310 provides exemptions for banks [.310(3)], savings and loans [.310(4)], and credit unions [.310(6)]. No express exemption is provided, however, for mutual or stock savings banks. The Securities Administrator finds that the premise of the exemptions from registration for banks, savings and loans, and credit unions is that the issuing institution is under the close supervision of federal or state banking regulators. Therefore, to the extent that a mutual or stock savings bank is supervised as a bank, the securities it issues or guarantees may be exempted under RCW 21.20.310(3). Similarly, securities issued or guaranteed by an institution that is supervised by savings and loan regulators would be exempt under RCW 21.20.310(4).

Conclusion:

RCW 21.20.310(3) and .310(4) are available for the securities issued by mutual or stock savings banks to the extent that such entities are supervised as banks or savings and loans.

Adopted: January 1, 1991

Replaces: Statement of Policy 85-65
Jack L. Beyers, Securities Administrator
Prepared by: William M. Beatty, Securities Examiner

 


SECURITIES ACT INTERPRETIVE STATEMENT-05

RE: RCW 21.20.310 - EXEMPT SECURITIES THAT ARE GUARANTEED

Question Presented:

What qualifies as the "guarantee" of an exempt security?

Statutes:

RCW 21.20.310(1) through .310(7) lists certain types of exempt securities, including securities that are "guaranteed" by banks, domestic and foreign governments, insurance companies, credit unions, savings and loan associations, public utilities and common carriers.

RCW 21.20.005(4) defines "guaranteed" to mean "guaranteed as to payment of principal, interest or dividends."

Discussion:

The Administrator has determined that an exempt security is "guaranteed" within the meaning of RCW 21.20.310 if the guarantee satisfies the following conditions:

  1. The guarantor makes an unconditional promise to pay the security holders;
  2. The term of the guarantee is concurrent with the term of the underlying security;
  3. The guarantor's promise to pay constitutes an irrevocable commitment to pay the security holders;
  4. The promise to pay represents a direct obligation from the guarantor to the security holders; and
  5. The guarantor's promise to pay is not available to the issuer's creditors and is not subject to an issuer's bankruptcy estate.

Conclusion:

A guarantee that satisfies the above conditions will generally qualify as a "guarantee" of an exempt security.

Adopted: January 1, 1991
Replaces: Statements of Policy 81-7 and 81-8
Jack L. Beyers, Securities Administrator
Prepared by: Janet G. McKinney, Securities Examiner

 


SECURITIES ACT INTERPRETIVE STATEMENT-06

RE: RCW 21.20.310(10) - EMPLOYEE BENEFIT PLANS - PERMITTED BENEFICIARIES - ACCELERATION OF EFFECTIVENESS - LATE FILING - SUBSEQUENT DISTRIBUTIONS OF SECURITIES

The following are commonly asked questions and the Division's discussion and conclusions regarding the employee benefit plan exemption:

Statute:

RCW 21.20.310(10) exempts "any security issued in connection with an employee's stock purchase, savings, pension, profit-sharing, or similar benefit plan if: (a) The plan meets the requirements for qualification as a pension, profit sharing, or stock bonus plan under section 401 of the internal revenue code, as an incentive stock option plan under section 422 of the internal revenue code, or as an employee stock purchase plan under section 423 of the internal revenue code; or (b) the director is notified in writing with a copy of the plan thirty days before offering the plan to employees in this state. In the event of late filing of notification the director may upon application, for good cause excuse such late filing if he or she finds it in the public interest to grant such relief."

Question No. 1:

To what extent does RCW 21.20.310(10) exempt the issuance of securities in connection with an employee benefit plan to non-employees?

Discussion:

The Administrator frequently receives inquiries regarding employee benefit plans that include non-employees such as consultants, independent contractors, agents, or customers. The Division follows Rule 405 of the federal Securities Act of 1933 which defines employee benefit plan as follows:

Securities issued to other persons pursuant to an employee benefit plan are not exempt under RCW 21.20.310(10).

Question No. 2:

Under what circumstances will the Administrator accelerate the 30 day waiting period for employee benefit plans that must file with the Division in order to utilize the exemption provided by RCW 21.20.310(10)?

Discussion:

It is the policy of the Securities Division to accelerate the 30 day waiting period to the date of the letter from the Division acknowledging the effectiveness of the exemption. Exemption filings are typically processed and a letter issued several days after the filing is received.

Question No. 3:

What are the consequences of a late filing?

Discussion:

Pursuant to the 1995 revisions to RCW 21.20.310(10), certain internal revenue code qualified plans are not required to file to claim the exemption. Other plans must file thirty days before offering the plan to beneficiaries in this state. In the event of late filing, "the director may upon application, for good cause excuse such late filing if he or she finds it in the public interest to grant such relief." As discussed above, the Administrator routinely accelerates the thirty day waiting period. Where securities have been issued prior to filing, the Administrator will typically acknowledge the exemption as to issuances on or after the date of the letter from the Administrator acknowledging effectiveness. With regard to the prior issuances, the Administrator will typically take no action to assert any violation of the registration sections of the state Securities Act. The Division will not, however, express an opinion regarding any potential civil liability of the issuer for those transactions.

Question No. 4:

Does the scope of the exemption include the issuance of securities, such as stock, pursuant to such a plan?

Discussion:

Yes. Prior to the 1995 revisions to the exemption, only the investment contract evidencing an employee's interest in the plan was exempted by RCW 21.20.310(10). Subsequent distributions of securities pursuant to a plan, such as in a stock purchase plan, had to be registered or utilize another exemption. The exemption now covers all securities "issued in connection with" an employee benefit plan. Practitioners should disregard WAC 460-42A-010 which is contrary to the statute and will be repealed by the end of 1996.

Conclusions:

The employee benefit plan exemption is available for securities issued in connection with plans issued to employees, directors, general partners, trustees (where the registrant is a business trust), officers or, in certain circumstances, consultants or advisors. The Division will accelerate the thirty day waiting period to the date of the letter from the Administrator acknowledging the effectiveness of the exemption. Plans which are filed after offers and/or sales have already occurred may still be eligible to use the exemption.

Adopted: January 1, 1991; As amended January 1, 1996
Replaces: Statements of Policy 81-3, 83-44 and 87-69
Deborah R. Bortner, Securities Administrator
Prepared by: William M. Beatty and Nelda J. Shannon, Securities Examiners

 


SECURITIES ACT INTERPRETIVE STATEMENT-07

RE: RCW 21.20.310(11) - NONPROFIT ORGANIZATION EXEMPTION DISCLOSURE REQUIREMENTS

Question presented:

What type of disclosure must be made by an issuer utilizing the exemption found in RCW 21.20.310(11)?

Statute:

RCW 21.20.310(11) exempts "any security issued. . . by a nonprofit organization. . . if such nonprofit organization first files a notice specifying the terms of the offering. . . . The notice shall consist of. . . (f) A statement that the issuer shall provide to the prospective purchaser written information regarding the securities offered prior to the consummation of any sale. . ." (emphasis added)

Discussion:

Issuers wishing to utilize this exemption are required to file a notice on a Division supplied form by which they agree to supply "written information" to prospective purchasers and specifically agree to incorporate certain legends in that disclosure. Some issuers have misunderstood the statute to require no disclosure beyond a recitation of the legends. The above-emphasized portion of the statute indicates that additional written information must be provided. Furthermore, RCW 21.20.010 makes the failure to disclose material facts regarding an offering unlawful, regardless of whether the security is exempt. The Division recommends that issuers follow the disclosure guidelines contained in the North American Securities Administrators Association's (NASAA) "Statement of Policy for Church Bond Offerings," CCH NASAA Reports, 1001.

Conclusion:

Issuers relying upon RCW 21.20.310(11) must comply with RCW 21.20.010 and provide written disclosures of all material facts to every prospective purchaser regarding the securities being offered.

Adopted: January 1, 1991
Replaces: Statement of Policy 83-46
Jack L. Beyers, Securities Administrator
Prepared by: William M. Beatty, Securities Examiner

 


SECURITIES ACT INTERPRETIVE STATEMENT-09

RE:  - NONPUBLIC OFFERINGS & ISOLATED TRANSACTIONS - GENERAL PARTNERSHIPS AS PURCHASERS

Question presented:

In determining the availability of the statutory nonpublic offering and isolated transaction exemptions under RCW 21.20.320(1) for purchases by general partnerships, is each general partner considered to be a separate purchaser?

Statute:

RCW 21.20.320(1) exempts "any isolated transaction, or sales not involving a public offering. . . ."

Discussion:

A general partnership may be considered to be either an entity or an aggregate of separate persons. Exemptions from registration are narrowly construed. Therefore, for purposes of RCW 21.20.320(1), the Securities Administrator interprets a sale to a general partnership to constitute a sale to each partner.

Conclusion:

For purposes of determining the applicability of the isolated transaction and statutory nonpublic offering provisions of RCW 21.20.320(1), a sale to a general partnership will constitute a sale to each partner.

Adopted: January 1,1991
Replaces: Statement of Policy 83-52
Jack L. Beyers, Securities Administrator
Prepared by: William M. Beatty, Securities Examiner

 


SECURITIES ACT INTERPRETIVE STATEMENT - 10

RE:

Question presented:

Is a self-directed pension plan, such as an Individual Retirement Account (IRA) or Keogh account, a "pension trust" within the meaning of the above-referenced statutes?

Statutes and Regulation:

RCW 21.20.320(8) exempts from registration offers and sales to "pension or profit-sharing trusts. . . ."

RCW 21.20.005(3)(b) excludes from the definition of "broker-dealer" "a person having no place of business in this state if the person effects transactions . . . exclusively with . . . pension or profit-sharing trusts. . . ."

RCW 21.20.005(6)(g)(i) provides a similar exclusion from the definition of "investment adviser" for a person whose clients consist exclusively of pension trusts and other institutions.

Discussion:

The Administrator finds that self-directed pension plans such as IRA's and Keoghs were not envisioned when the Securities Act was enacted in 1959. The draftsmen's commentary to 402(b)(8) of the Uniform Securities Act, which is the corresponding section to RCW 21.20.320(8), indicates that the exemption is premised upon the "sophistication" of the listed institutions. IRA's and Keoghs are typically either directed by the individual taxpayer or by an entity over which the taxpayer retains the right to such direction.

Conclusion:

IRA and Keogh accounts are not "pension or profit sharing trusts" within the meaning of the above-referenced statutes and regulation.

Adopted: January 1, 1991.
Replaces: Statement of Policy 83-38
Jack L. Beyers, Securities Administration

 


SECURITIES ACT INTERPRETIVE STATEMENT-11

RE: RCW 21.20.320(8) - EXEMPTIONS - "INSTITUTIONAL BUYER"

Question Presented:

What constitutes an "institutional buyer" for the purpose of the exemption provided by RCW 21.20.320(8)?

Statute:

RCW 21.20.320(8) exempts "any offer or sale to any bank, savings institution, insurance company, investment company as defined in the Investment Company Act of 1940, pension or profit-sharing trust, or other financial institution or institutional buyer. . . ." (emphasis added)

Discussion:

The Administrator interprets the term "institutional buyer," as used in RCW 21.20.320(8), to include the following:

The Administrator further finds that the term "institutional buyer" does not include a natural person, individual retirement account (IRA), Keogh account, or other self-directed pension plan. The administrator may consider the inclusion of other entities within the "institutional buyer" definition.

Conclusion:

The definition of "institutional buyer" excludes natural persons and includes other entities, as specified by the Administrator, of sufficient expertise and financial strength to bear the risks of purchasing unregistered securities.

Adopted: January 1, 1991 Replaces: N/A--New Interpretive Statement
Jack L. Beyers, Securities Administrator
Prepared by: William M. Beatty, Securities Examiner

 


SECURITIES ACT INTERPRETIVE STATEMENT-12

RE: RCW 21.20.320(11) - OFFERS TO HOLDERS OF TRANSFERABLE WARRANTS

Question presented:

Does RCW 21.20.320(11) exempt transactions pursuant to offers to transferable warrant holders of the issuer when such warrants are exercisable more than 90 days after their issuance?

Statute:

RCW 21.20.320(11) exempts "any transaction pursuant to an offer to an existing security holder of the issuer, including persons who at the time of the transaction are holders of. . . transferable warrants exercisable within not more than ninety days of their issuance. . . ." (emphasis added)

Discussion:

The Administrator interprets the above-highlighted language to exclude from the exemption offers and sales of securities to warrant holders when such warrants are exercisable more than 90 days after their issuance. This interpretation will be followed even if warrants are exercised within 90 days of issuance unless the warrant agreement states that the warrants must be exercised within not more than 90 days of issuance.

Conclusion:

RCW 21.20.320(11) is not available for the issuance of securities to warrant holders if the warrant agreement allows a transfer of those warrants to take place more than 90 days after warrants were issued.

Adopted: January 1, 1991
Replaces: Statement of Policy 83-33
Jack L. Beyers, Securities Administrator
Prepared by: William M. Beatty, Securities Examiner

 


SECURITIES ACT INTERPRETIVE STATEMENT-13

RE: RCW 21.20.320(11) - OFFERS OR SALES TO EXISTING SECURITY HOLDERS - APPLICABILITY IN PARENT/SUBSIDIARY SITUATIONS

Question Presented:

Does the exemption provided by RCW 21.20.320(11), which exempts offers and sales to existing security holders of the issuer, extend to situations in which the shares of a subsidiary are offered and issued to shareholders of the parent company?

Statute:

RCW 21.20.320(11) exempts from registration "any transaction pursuant to an offer to existing security holders of the issuer. . . ." (emphasis added)

Discussion:

The primary purpose of the Securities Act is to promote investor protection by requiring the registration of securities offers in this state. Therefore, exemptions from registration are narrowly construed. The term "issuer," as used in RCW 21.20.320 (11), means only the direct issuer of the security, and does not include affiliates of the issuer. When a subsidiary corporation issues securities, the subsidiary, not its parent, is the issuer for the purposes of RCW 21.20.320(11). Only shareholders of the subsidiary are existing security holders for purposes of the exemption.

Conclusion:

RCW 21.20.320(11) does not exempt the issuance of a wholly owned subsidiary's shares to shareholders in the parent company.

Adopted: January 1, 1991
Replaces: Interpretive Statement 2-89
Jack L. Beyers, Securities Administrator
Prepared by: William M. Beatty, Securities Examiner

 


SECURITIES ACT INTERPRETIVE STATEMENT-14

RE: RCW 21.20.320(11) - OFFER TO EXISTING SECURITY HOLDERS OF THE ISSUER - APPLICABILITY TO MUTUAL FUNDS

Questions presented:

Does RCW 21.20.320(11) exempt from registration the sale of additional no-load mutual fund shares to fund shareholders?

Does the exemption cover the sale of no-load shares to shareholders of a related fund?

Statute:

RCW 21.20.320(11) exempts "any transaction pursuant to an offer to existing security holders of the issuer. . . if (a) no commission or other remuneration . . . is paid . . . for soliciting any security holder in this state. . . ." (emphasis added)

Discussion:

Each separate corporation, trust, or other legal entity is considered a separate issuer. Therefore, the exemption is available for situations where a fund sells additional shares to its shareholders because the same issuer is involved. Consequently, transactions pursuant to dividend or capital gain reinvestment plans could utilize the exemption and such distributions would not be counted against the issuer's permit amount. Of course, no direct or indirect commission can be paid for the solicitation and the shareholders in question may not have had zero account balances at the time of the sale.

The exemption, however, is not available when shares of one fund are sold to the shareholders of a "related" fund where the funds are organized as separate legal entities. In such an instance two separate issuers are involved. Shareholders of a "related fund" are not shareholders of the issuer.

Conclusion:

No-load mutual funds may utilize RCW 21.20.320(11) to exempt the sale of additional shares to their own shareholders. The exemption is not available where shares of a fund are sold to shareholders of a related fund unless the funds are part of the same legal entity.

Adopted: January 1, 1991
Replaces: Statement of Policy 83-25
Jack L. Beyers, Securities Administrator
Prepared by: William M. Beatty, Securities Examiner

 


SECURITIES ACT INTERPRETIVE STATEMENT-16

RE: RCW 21.20.320(3), WAC 460-21B-060(22), WAC 460-22B-090(18) - UNSOLICITED ORDERS

Question presented:

Under what circumstances is an order or offer to buy received by a broker-dealer or salesperson "unsolicited"?

Statute and Rules:

RCW 21.20.320(3) exempts "any nonissuer transaction effected by or through a registered broker-dealer pursuant to an unsolicited order or offer to buy. . . ." (Emphasis added) WAC 460-21B-060(22), pertaining to broker-dealers, and WAC 460-22B-090(18), pertaining to salespersons, makes it a dishonest or unethical business practice to mark "any order ticket or confirmation as unsolicited when in fact the transaction is solicited."

Discussion:

Exemptions to registration are narrowly construed in order to help ensure investor protection. Therefore, the Administrator narrowly interprets the phrase "unsolicited order or offer to buy". Without limiting other possible circumstances, an "unsolicited order or offer to buy" does not include any transaction which involves the following action by a broker-dealer or salesperson:

Conclusion:

A transaction will be deemed "solicited" under the aforementioned circumstances. Regardless of whether the order is solicited or unsolicited, the broker-dealer or salesperson is under the same duty to know, and to determine the suitability of the investor for, his or her client. This exemption is available for broker-dealers only and does not provide an exemption for the seller of the security.

Adopted: January 1, 1991; As amended: April 1, 1991 and May 31, 1996
Replaces: Statement of Policy 85-64
Deborah R. Bortner, Securities Administrator
Prepared by: William M. Beatty and Nelda Shannon, Securities Examiners

 


SECURITIES ACT INTERPRETIVE STATEMENT-20

RE: RCW 21.20.320(10) - PREORGANIZATION CERTIFICATES

Question Presented:

What is meant by the phrase "preorganization certificate or subscription" in the exemption provided by RCW 21.20.320(10)?

Statute:

RCW 21.20.320(10) provides an exemption from registration for "any offer or sale of a preorganization certificate or subscription if (a) no commission or other remuneration is paid or given directly or indirectly for soliciting any prospective subscriber, (b) the number of subscribers does not exceed ten, and (c) no payment is made by any subscriber."

Discussion:

RCW 21.02.320(10) is based upon 402(b)(10) of the Uniform Securities Act (Act). The official comment to the Act states that the purpose of 402(b)(10) "is to enable a new enterprise to obtain the minimum number of subscriptions required by the corporation law. Hence there may be a publicly advertised offering of preorganization subscriptions. But there may be no payment until effective registration unless another exemption is available. . . . 402(b)(10) itself simply postpones registration; it does not excuse registration altogether." See CCH Blue Sky Law Reporter, 5542.

Therefore, RCW 21.20.320(10) is only available to the extent that the corporation laws require a minimum number of subscriptions to form a corporation. The Administrator notes that since no minimum subscription is required to form a corporation pursuant to Washington law, the exemption is not available to Washington corporations. The exemption is not available to non-corporate entities.

Conclusion:

RCW 21.20.320(10) is not available unless the issuer is a corporation and the laws under which it is incorporated require a minimum number of subscriptions.

Adopted: January 11, 1991

Replaces: N/A - New Interpretive Statement

Jack L. Beyers, Securities Administrator

Prepared by: William M. Beatty, Securities Examiner


SECURITIES ACT INTERPRETIVE STATEMENT -21

RE: Performance Standards in Advertisements
RCW 21.20.020 Unlawful acts of persons advising another.
WAC 460-24A-100 Advertisements by investment advisers - -100(1)(e)-False or misleading statements of material facts in advertisements constitute fraud pursuant to RCW 21.20.020.

Questions Presented:

  1. May an investment adviser advertise its past performance?
  2. If advertisement of past performance/performance standards are allowed what conditions or restrictions apply?
  3. Do these conditions apply to information on past performance provided to customers in correspondence or account statements?

Statutes and Regulations:

RCW 21.20.020 states that "any act, practice, or course of business which operates or would operate as a fraud" is an unlawful act when engaged in by persons advising others regarding securities, if consideration for such advice is received.

WAC 460-24A-100(1)(e) states that any advertisement for an investment adviser which contains any untrue statement of a material fact, or which is otherwise false or misleading constitutes a fraud under RCW 21.20.020.

Discussion:

Investment advisers often use past performance figures in an effort to communicate their effectiveness to existing clients and in seeking new clients. Members of the public often misunderstand the meaning of such performance figures. For the protection of public investors, investment advertisements that are misleading constitute fraud under WAC 460-24A-100(1)(e) and RCW 21.20.020 of the Securities Act. In order to help investment advisers to avoid inadvertent misrepresentations the Division is setting forth this policy statement as a guide to acceptable practices when using performance standards in advertising.

Advertising past performance (also referred to as "performance standards," "performance data" or "performance results") is permitted as long as those figures do not constitute fraud under RCW 21.20.020. The statute and related regulations do not create a ban on the use of performance standards in advertisements by investment advisers; however, they do circumscribe their use. The facts and circumstances surrounding the use of performance results must be reviewed as to the form and content, implications or inferences arising from the advertisement and the sophistication of the present or prospective client. The same considerations that apply to determining whether information relating to performance results in advertising constitute fraud under RCW 21.10.020 also apply to information relating to performance results contained in investment adviser correspondence with clients and in client account statements.

A. Basic Performance Results:

When using performance data in advertisements or communications with clients all material facts necessary to avoid any unwarranted inference must be disclosed. In order to avoid misleading inferences the following standards must be adhered to:

  1. The effect of material market or economic conditions on portrayed results must be stated;
  2. The effect of fees, commissions or other client paid expenses (with the exception of custodial fees) on performance must be stated;
  3. The effect of dividends and earnings on the results portrayed must be stated;
  4. Disclosure of the potential for both profit and loss must be made;
  5. Comparison of results to an index or other portfolio must disclose facts relevant to the comparison which include disclosure of the following:
      1. Capital gains and losses, both realized and unrealized;
      2. Type of security;
      3. Objective;
      4. Volatility or stability;
      5. Diversification;
      6. Cash infusions/new money;
      7. Reinvestment of dividends; and
  1. Appropriate time frames to compute results must be used;
  2. Disclosure of any material conditions, objectives, or investment strategies used to obtain the performance result must be made;
  3. Where the performance results are only for a selected group of clients, the basis on which the selection was made must be disclosed.

B. Model Performance Results:

In addition to the disclosures required when using basic performance figures, where the performance data is based on the use of certain types of "model" portfolios further specific disclosures must be made. Model results are essentially hypothetical portfolios, which are first created, then monitored based upon forward-looking strategies and are measured as if they constituted a real portfolio.

In order to be presented in a manner that is not misleading to the investing public, model results must be authenticated and may not employ the use of "backtested" figures. Backtesting involves developing a strategy based upon historical performance and then applying the strategy to those past figures. Such backtested performance results often create misleading inferences. Therefore, to eliminate any confusion, backtested performance results may not generally be used in investment adviser advertising unless accompanied by prominent disclosure regarding the origin of the figures.

Authenticated model performance results may be used in advertising when the following disclosures appear:

  1. Prominent disclosure of the limitations inherent in the model results;
  2. Material changes in the conditions, objectives, or investment strategies of the model portfolio;
  3. If applicable, that some of the securities or strategies reflected in the model portfolio do not relate, or relate only partially, to the services currently offered by the adviser;
  4. If applicable, that the advisers clients actually had investment results that were materially different from those portrayed in the market; and
  5. A statement advising the reader that the results do not represent actual trading.

Conclusion:

Investment advisers may use performance standards in advertising. Any use of performance standards in advertising must disclose all information necessary to ensure that the advertisement does not lead readers to draw unwarranted conclusions from the advertisement. The advertisement may not contain any untrue statement of material fact.

The points discussed above are not intended as the exclusive factors to consider in determining the disclosures necessary to make performance figures not false or misleading.

Adopted: 1/25/99
Deborah R. Bortner, Securities Administrator
Prepared by: Kristina Kneip, Securities Examiner


SECURITIES ACT INTERPRETIVE STATEMENT -22

RE: Investment Adviser Fee Sharing - Credit Unions and other Financial Institutions
RCW 21.20.040 - Registration and notice filings required.
RCW 21.20.005(6) – Definition of investment adviser
.

Questions Presented:

Statutes and Regulations:

RCW 21.20.040(3) states:

It is unlawful for any person to transact business in this state as an investment adviser or investment adviser representative unless: (a) The person is so registered or exempt from registration under this chapter; (b) the person has no place of business in this state and (i) the person's only clients in this state are investment advisers registered under this chapter, federal covered advisers, broker-dealers, banks, savings institutions, trust companies, insurance companies, investment companies as defined in the Investment Company Act of 1940, employee benefit plans with assets of not less than one million dollars, or governmental agencies or instrumentalities, whether acting for themselves or as trustees with investment control, or (ii) during the preceding twelve-month period the person has had fewer than six clients who are residents of this state other than those specified in (b)(i) of this subsection; (c) the person is an investment adviser to an investment company registered under the Investment Company Act of 1940; (d) the person is a federal covered adviser and the person has complied with requirements of RCW 21.20.050; or (e) the person is excepted from the definition of investment adviser under section 202(a)(11) of the Investment Advisers Act of 1940.

 “Investment adviser” is defined in RCW 21.20.005(6) to mean:  

Any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as a part of a regular business, issues or promulgates analyses or reports concerning securities. "Investment adviser" also includes financial planners and other persons who, as an integral component of other financially related services, (a) provide the foregoing investment advisory services to others for compensation as part of a business or (b) hold themselves out as providing the foregoing investment advisory services to others for compensation. Investment adviser shall also include any person who holds himself out as a financial planner.

     "Investment adviser" does not include (a) a bank, savings institution, or trust company, (b) a lawyer, accountant, certified public accountant licensed under chapter 18.04 RCW, engineer, or teacher whose performance of these services is solely incidental to the practice of his or her profession, (c) a broker-dealer or its salesperson whose performance of these services is solely incidental to the conduct of its business as a broker-dealer and who receives no special compensation for them, (d) a publisher of any bona fide newspaper, news magazine, news column, newsletter, or business or financial publication or service, whether communicated in hard copy form, by electronic means, or otherwise, that does not consist of the rendering of advice on the basis of the specific investment situation of each client, (e) a radio or television station, (f) a person whose advice, analyses, or reports relate only to securities exempted by RCW 21.20.310(1), (g) an investment adviser representative, or (h) such other persons not within the intent of this paragraph as the director may by rule or order designate.

Discussion:

A. Persons receiving advisory fees are “engaged in the business of advising others.”

 Investment advisers frequently enter into agreements whereby fees generated by providing investment advice are shared with other persons or entities.  An “investment adviser” is defined as a person “who, for compensation, engages in the business of advising others.” Any person who receives advisory fees satisfies this definition.  Therefore, any person who receives a portion of the advisory fee, including a wrap fee (which constitutes the receipt of both advisory and brokerage compensation), must be appropriately licensed or exempted or excluded from such licensure.

B. Statutory Exclusions for certain financial institutions.

RCW 21.20.005(6)(a) excludes banks, savings institutions, or trust companies from the definition of investment adviser.  Therefore, these entities may receive investment advisory fees even though they may not be licensed as investment advisers.

C. Credit Unions and Credit Union Service Organizations may receive advisory fees in certain circumstances.

The Division has received inquiries in connection with an investment advisor offering advisor services on the premises of, and sharing advisory fees with, a credit union.  RCW 21.20.005(6)(a) does not specifically exclude a credit union or a credit union service organization (CUSO) from the definition of “investment adviser.”  Therefore, the credit union or CUSO may be subject to registration as an investment adviser.

The Division has previously addressed similar issues in connection with broker-dealer services being offered on credit union premises.  Based in part on SEC interpretations of federal securities laws, the Division adopted WAC 460-21C-020, which provides that under certain “networking arrangements,” a credit union (or other financial institution) need not be licensed as a broker-dealer in order to receive a portion of the fees generated by the brokerage activities on credit union premises.  The SEC’s “Chubb” no-action letter of November 24, 1993 (Chubb Letter), upon which WAC 460-21C-020 is based, discusses the factors that lead to a determination that a credit union in a networking arrangement need not be licensed as broker-dealer.  The key factors include, but are not limited to:

  1.  The broker-dealer and its representatives operating on credit union premises are appropriately licensed.

  2. The broker-dealer’s location is physically distinct from surrounding the credit union activity. 

  3. The broker-dealer informs all securities customers, and the customers acknowledge in writing, that the brokerage services are provided by the broker-dealer and not by the credit union or its CUSO, and that the securities acquired by the customer are not insured or guaranteed by the government.    

The Division takes the position that credit unions and CUSOs may receive fees generated from advisory activities on credit union premises without being licensed as investment advisors, and without their employees being licensed as investment adviser representatives, if they enter into an agreement containing provisions similar to those discussed in the Chubb Letter.  Among the provisions such agreements should contain are:

  1. The firms and individuals providing the advisory services must be appropriately licensed with the Division, or in the case of a federal covered adviser, the SEC;

  2. The investment adviser must be responsible for the training and supervision of all persons providing investment advisory services. 

  3. The adviser and its representatives will operate from a location on the credit union premises that is physically distinct from the surrounding credit union activity.

  4. No credit union employee shall accept funds from customers to purchase advisory services.

  5. As appropriate, the investment adviser will provide written disclosure to customers receiving advisory services that the products and services being offered or recommended are (a) not insured by deposit insurance; (b) are not deposits with, obligations of, or guaranteed by the credit union or CUSO; and (c) as applicable, subject to investment risk, including loss of principal.

  6. The adviser must provide a separate written disclosure document where there is compensation for referrals and explain the terms of that compensation.

  7. The investment adviser will require written acknowledgement, signed by the customer, of the customer’s receipt of the disclosures required by items 5 and 6, above.

D. Liability for Unlawful Acts

 Nothing in this Interpretive Statement shall be deemed to limit in any way any liability that may by incurred by any person for violation of RCW 21.20.010 through RCW 21.20.030.

Conclusion:

        Persons and entities receiving any portion of an advisory fee are “engaged in the business of advising others” and, therefore must be appropriately licensed as investment advisers or investment adviser representatives unless they are exempted from such registration or excluded from the statutory definition.  Entities such as banks, savings institutions, and trust companies are excluded from the definition of “investment adviser” and may therefore receive advisor fees without being licensed as investment advisers.  Credit unions and CUSOs, while not statutorily excluded, may nevertheless receive advisory fees without registration if they enter into agreements with appropriately licensed investment advisers that contain certain provisions and if the advisor agrees to provide the additional disclosures and acknowledgements.

Adopted:  April 1, 2002
Deborah R. Bortner, Securities Administrator
Prepared by:  William M. Beatty, General Counsel

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