Adopted Rules

TITLE 7. BANKING AND SECURITIES

PART 7. STATE SECURITIES BOARD
CHAPTER 107. TERMINOLOGY

7 TAC §107.2

The Texas State Securities Board adopts an amendment to §107.2, concerning definitions, without changes to the proposed text as published in the October 14, 2011, issue of the Texas Register (36 TexReg 6827).

The definition of "EFD System" was changed to "Electronic Filing Depository system" to reflect the renaming of the program in anticipation of the future expansion of the system to facilitate electronic filing of other forms.

Terminology used in the Board's rules will be consistent with that used by other regulators and the industry.

No comments were received regarding adoption of the amendment.

The amendment is adopted under Texas Civil Statutes, Article 581-28-1. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes.

The adopted amendment affects Texas Civil Statutes, Article 581-1, et seq.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on December 1, 2011.

TRD-201105274

Carla James
Interim Securities Commissioner
State Securities Board

Effective date: December 21, 2011

Proposal publication date: October 14, 2011

For further information, please call: (512) 305-8303

CHAPTER 115. SECURITIES DEALERS AND AGENTS

7 TAC §115.3

The Texas State Securities Board adopts an amendment to §115.3, concerning examination, with changes to the proposed text as published in the October 14, 2011, issue of the Texas Register (36 TexReg 6828). A change was made in subsection (d)(4) to the reference of the Americans with Disabilities Act of 1990, as amended.

The waiver of reexamination requirements for a dealer or an agent who has completed the required examinations and whose registration with the Financial Industry Regulatory Authority ("FINRA") and with another state securities regulator has not lapsed more than two years is consistent with the North American Securities Administrators Association's recognition and acceptance of the FINRA Central Registration Depository ("CRD") Continuous Registration Period. Also, accommodations are available upon request to persons with disabilities under the Americans with Disabilities Act of 1990, as amended ("ADA"), who take the Texas securities law examination.

The registration process will be streamlined by coordinating the Texas waiver provisions with those on the CRD system, and examinees with ADA disabilities can request and receive accommodations.

No comments were received regarding adoption of the amendment.

The amendment is adopted under the Texas Occupations Code §54.003 and Texas Civil Statutes, Articles 581-13.D and 581-28-1. Occupations Code §54.003 provides that agencies shall adopt rules to provide reasonable examination accommodations to examinees diagnosed as having dyslexia for each licensing examination administered by the agency. Article 581-13.D provides the Board with authority to waive examination requirements for any applicant or class of applicants. Article 581-28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes.

The adopted amendment affects Texas Occupations Code §54.003 and Texas Civil Statutes, Articles 581-13 and 581-19.

§115.3.Examination.

(a) Requirement. To determine the applicant's qualifications and competency to engage in the business of dealing in and selling securities, the State Securities Board requires a written examination on general securities principles and on state securities law. Applicants must make a passing score, as determined by the North American Securities Administrators Association, FINRA, or the Securities Commissioner, as appropriate, on any required examination.

(b) Examinations accepted.

(1) Each applicant must pass an examination on general securities principles. This requirement may be satisfied by passing an examination on general securities principles administered by FINRA. As set forth in paragraph (3) of this subsection, applicants for restricted registrations may substitute an examination dealing with a particular type of security for an examination on general securities principles.

(2) For purposes of this subsection, the Securities Commissioner recognizes the following general examinations administered by FINRA:

(A) Series 1--General Securities Examination;

(B) Series 2--FINRA Non-Member General Securities Examination; and

(3) In lieu of an examination on general securities principles, the Securities Commissioner recognizes the following limited examinations, administered by FINRA, for the corresponding restricted registrations:

(A) for persons seeking a restricted registration to deal exclusively in securities issued by open-end investment companies registered under the Texas Securities Act or the Investment Company Act of 1940, the Series 6--Investment Company Products/Variable Contracts Representative Examination;

(B) for persons seeking a restricted registration to accept orders unsolicited by such person from existing customers of the dealer, the Series 11--Assistant Representative/Order Processing Examination;

(C) for persons seeking a restricted registration to deal exclusively in direct participation program securities, the Series 22--Direct Participation Programs Representative Examination;

(D) for persons seeking a restricted registration to deal exclusively in municipal securities, the Series 52--Municipal Securities Representative Examination;

(E) for persons seeking a restricted registration to deal exclusively in corporate securities, the Series 62--Corporate Securities Representative Examination;

(F) for persons seeking a restricted registration to deal in all general securities except municipal securities, either the Series 17--General Securities Representative Examination, the Series 37--General Securities Representative Examination, the Series 38--General Securities Representative Examination, or the Series 47--General Securities Representative Examination;

(G) for persons seeking a restricted registration to deal exclusively in investment banking, the Series 79--Investment Banking Qualification Examination; and

(H) for persons seeking a restricted registration to deal exclusively in government securities, the Series 72--Government Securities Representative Examination. A person registered on or before September 1, 1998, for the purpose of dealing exclusively in government securities, is not required to pass the Series 72 examination.

(4) Each applicant must pass an examination on state securities law. This requirement may be satisfied by passing an examination on the Texas Securities Act administered by this Agency or by passing the Uniform Securities Agent State Law Examination (Series 63) or the Uniform Combined State Law Examination (Series 66).

(1) All persons who were registered in Texas on August 23, 1963, are not required to take any examinations.

(2) A full waiver of the examination requirements of the Texas Securities Act, §13.D, is granted by the Board to the following classes of persons:

(A) issuers offering securities in rights offerings to their own securities holders;

(B) issuers offering their own securities in exchange for outstanding securities of another corporation, provided consummation of the offer is dependent upon tender of at least 80% of such outstanding securities;

(C) issuers restricting distribution of securities to security holders of an affiliate company, a subsidiary, or a parent of the issuer, provided the registration certificate is issued on a temporary basis and terminated immediately after the offering;

(D) officers and employees whose firms restrict their officers' and employees' securities activities to acting as brokers between and among principals for the sale of a majority of the stock or equity securities of a privately held business pursuant to a privately negotiated purchase agreement, where the managerial control of the business will devolve upon the purchaser(s) and where compensation received by the firm will be payable for the brokerage activities only;

(E) a finder;

(F) a person who completed the required examinations, but whose registration has lapsed for more than two years and who has been continually employed in a securities-related position with an entity which was not required to be registered; and

(G) a person who completed the required examinations and whose registration with FINRA and with another state securities regulator has not lapsed for more than two years.

(3) A partial waiver of the examination requirements of the Texas Securities Act, §13.D, is granted by the Board to the following classes of persons:

(A) applicants who have been continuously registered with the Securities and Exchange Commission, FINRA, or any other exchange listed in the Act, §6.F, or recognized by the Board pursuant to §111.2 of this title (relating to Listed and Designated Securities) for 10 years immediately preceding the application for registration in Texas. These applicants are required to pass an examination on state securities law as required by subsection (b)(4) of this section;

(B) applicants who passed the "state securities examination" promulgated and formerly administered by the Psychological Corporation, New York, New York, now the Psychological Corporation, San Antonio, Texas, which was an examination on general securities principles. These applicants are required to pass an examination on state securities law as required by subsection (b)(4) of this section;

(C) applicants seeking registration for the purpose of dealing exclusively in real estate syndication interests or condominium securities, provided such persons are licensed, at the time of application, under The Real Estate License Act (Texas Occupations Code, Chapter 1101). Such persons are not required to take a general securities examination, but are required to pass an examination on state securities law as required by subsection (b)(4) of this section;

(D) applicants seeking registration for the purpose of dealing exclusively in oil and gas interests (other than interests in limited partnerships). Such persons are not required to take the general securities examination, but are required to pass an examination on state securities law as required by subsection (b)(4) of this section. Provided, however, any persons registered prior to January 1, 1976, for the purpose of dealing exclusively in oil and gas interests, are not required to pass an examination; and

(E) applicants who are officers, partners, or employees of an issuer (other than an open-end investment company) if the issuer's securities will be registered for sale in Texas. Such officers, partners, and employees are not required to take the general securities examination, but are required to pass an examination on state securities law as required by subsection (b)(4) of this section. Evidences of registration granted pursuant to this subparagraph are restricted to sales of the currently registered securities of the issuer.

(4) The Securities Commissioner in his or her discretion is authorized by the Board to grant full or partial waivers of the examination requirements of the Texas Securities Act, §13.D.

(d) Texas securities law examination.

(1) The fee for each filing of a request to take the Texas securities law examination is $35. An admission letter issued by the Board is required for all entrants. The examination is given at 9:00 a.m. on each Tuesday at the office of the State Securities Board in Austin. The examination may be taken at other locations near principal population centers across the state. Testing centers require reservations and may charge an additional (monitor) fee for administering the examination. A list of examination centers with additional details may be obtained from the State Securities Board.

(2) While taking the examination on the Texas Securities Act, each applicant may use an unmarked copy of the Texas Securities Act as it is printed and distributed by the State Securities Board. No other reference materials are allowed to be used by applicants during the examination.

(3) Reexamination. An applicant who fails the examination on the Texas Securities Act may request reexamination. The applicant must bring his or her application up to date before retaking an examination.

(4) Disability accommodations. The Texas securities law examination shall be administered to applicants with disabilities in compliance with the Americans with Disabilities Act of 1990, as amended ("ADA").

(A) Any applicant with a disability who wishes to request disability accommodations must submit to the Securities Commissioner a Form 133.3, ADA Accommodations Request Form, that has been completed and signed by the applicant and includes supporting documentation from a licensed or certified health professional appropriate for diagnosing and treating the disability, at least 60 days prior to the examination. A prior history of receiving disability accommodations, without demonstration of a current need, will not necessarily warrant approval of disability accommodations.

(B) The Securities Commissioner may request additional documentation to substantiate a request for disability accommodations.

(D) All medical records provided to the Securities Commissioner are confidential under the Health Insurance Portability and Accountability Act ("HIPAA").

(E) The Securities Commissioner is not required to approve every request for disability accommodations or to provide every accommodation or service requested. The Securities Commissioner is not required to grant a request for disability accommodations if doing so would fundamentally alter the measurement of knowledge or the measurement of skill intended to be tested by the Texas securities law examination, would affect the security of the examination, or would create an undue financial or administrative burden.

(F) Once disability accommodations have been granted, they may not be altered during the examination unless prior approval of the Securities Commissioner is obtained.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on December 1, 2011.

TRD-201105275

Carla James
Interim Securities Commissioner
State Securities Board

Effective date: December 21, 2011

Proposal publication date: October 14, 2011

For further information, please call: (512) 305-8303

CHAPTER 116. INVESTMENT ADVISERS AND INVESTMENT ADVISER REPRESENTATIVES

7 TAC §116.1

The Texas State Securities Board adopts an amendment to §116.1, concerning general provisions, without changes to the proposed text as published in the October 14, 2011, issue of the Texas Register (36 TexReg 6829).

The definitions will correspond with the language used in relation to investment advisers in the Texas Securities Act, §12.B, and "solicitor" is expanded to include an investment adviser.

The regulated community will be informed of the meaning of terms used in the Texas Securities Act and Board rules and that terminology will be used consistently.

No comments were received regarding adoption of the amendment.

The adopted amendment affects Texas Civil Statutes, Articles 581-12, 581-12-1, 581-14, 581-18, and 581-19.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on December 1, 2011.

TRD-201105276

Carla James
Interim Securities Commissioner
State Securities Board

Effective date: December 21, 2011

Proposal publication date: October 14, 2011

For further information, please call: (512) 305-8303

7 TAC §116.3

The Texas State Securities Board adopts an amendment to §116.3, concerning examination, with changes to the proposed text as published in the October 14, 2011, issue of the Texas Register (36 TexReg 6830). A change was made in subsection (d)(4) to reference the Americans with Disabilities Act of 1990, as amended.

The waiver of reexamination requirements for an investment adviser or an investment adviser representative who has completed the required examinations and whose registration with another state securities regulator has not lapsed more than two years is consistent with the requirements for similarly situated dealers and agents. Also, accommodations are available upon request to persons with disabilities under the Americans with Disabilities Act of 1990, as amended ("ADA"), who take the Texas securities law examination.

The registration process will be streamlined by providing consistency with a similar waiver applicable to dealers and agents, and examinees with ADA disabilities can request and receive accommodations.

No comments were received regarding adoption of the amendment.

The adopted amendment affects Texas Occupations Code §54.003 and Texas Civil Statutes, Articles 581-13 and 581-19.

§116.3.Examination.

(a) Requirement. To determine the applicant's qualifications and competency to engage in the business of rendering investment advice, the State Securities Board requires written examinations. Applicants must make a passing score on any required examination.

(b) Examinations accepted.

(1) Each applicant for registration as an investment adviser or investment adviser representative must pass:

(A) the Uniform Investment Adviser Law Examination (the new entry level competency examination, Series 65, administered after December 31, 1999); or

(B) the following combination of examinations:

(i) a general securities representative examination as described in §115.3(b)(2) of this title (relating to Examination) or a limited examination as described in §115.3(b)(3) of this title; and

(ii) the Uniform Combined State Law Examination (Series 66), the Uniform Investment Advisers State Law Examination (Series 65, as it existed and was administered on or before December 31, 1999), or an examination on the Texas Securities Act administered by this Agency.

(2) Each of these examinations (except the Texas Securities Act examination) is administered by FINRA and can be scheduled by submitting a Form U-10 to FINRA.

(1) All persons who were registered in Texas on August 23, 1963, are not required to take any examinations.

(2) A full waiver of the examination requirements of the Texas Securities Act, §13.D, is granted by the Board to the following classes of persons:

(A) a person who was registered as an investment adviser or investment adviser representative on or before December 31, 1999, provided the person has maintained a registration as an investment adviser or investment adviser representative with any state securities administrator that has not lapsed for more than two years from the date of the last registration;

(B) applicants who are certified by the CFA Institute, or its predecessors, the Association for Investment Management and Research, the Financial Analysts Federation, or the Institute of Chartered Financial Analysts, to be chartered financial analysts (CFA);

(C) applicants who are certified by the Certified Financial Planner Board of Standards, Inc., to use the mark "CERTIFIED FINANCIAL PLANNER" (CFP);

(D) applicants who are designated by the American Institute of Certified Public Accountants as accredited personal financial specialists (PFS);

(E) applicants who are designated by the Investment Counsel Association of America, Inc., as Chartered Investment Counsel (CIC);

(F) applicants who are designated by the American College, Bryn Mawr, Pennsylvania, as chartered financial consultants (ChFC);

(G) a person who completed the required examinations, but whose registration has lapsed for more than two years and who has been continually employed in a securities-related position with an entity which was not required to be registered; and

(H) a person who completed the required examinations and whose registration with another state securities regulator has not lapsed for more than two years.

(3) The CFA Institute, the Certified Financial Planner Board of Standards, Inc., the American Institute of Certified Public Accountants, the American College, and the Investment Counsel Association of America, Inc., are required to submit to the Securities Commissioner any changes to their certification programs as such changes occur.

(4) A partial waiver of the examination requirements of the Texas Securities Act, §13.D, is granted by the Board to solicitor applicants. Such persons are required to pass only an examination on state securities law.

(5) The Securities Commissioner in his or her discretion is authorized by the Board to grant full or partial waivers of the examination requirements of the Texas Securities Act, §13.D.

(d) Texas securities law examination.

(3) The passing score for all applicants on the examination on the Texas Securities Act is 70%. An applicant who fails the examination on the Texas Securities Act may request reexamination. The applicant must bring his or her application up to date before retaking an examination.

(B) The Securities Commissioner may request additional documentation to substantiate a request for disability accommodations.

(D) All medical records provided to the Securities Commissioner are confidential under the Health Insurance Portability and Accountability Act ("HIPAA").

(F) Once disability accommodations have been granted, they may not be altered during the examination unless prior approval of the Securities Commissioner is obtained.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on December 1, 2011.

TRD-201105277

Carla James Interim Securities Commissioner State Securities Board

Effective date: December 21, 2011

Proposal publication date: October 14, 2011

For further information, please call: (512) 305-8303

7 TAC §116.5

The Texas State Securities Board adopts an amendment to §116.5, concerning minimum records, without changes to the proposed text as published in the October 14, 2011, issue of the Texas Register (36 TexReg 6832).

An internal cross-reference in subsection (b) is corrected.

The regulated industry will be better apprised of record-keeping requirements.

No comments were received regarding adoption of the amendment.

The adopted amendment affects Texas Civil Statutes, Article 581-14.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on December 1, 2011.

TRD-201105278

Carla James
Interim Securities Commissioner
State Securities Board

Effective date: December 21, 2011

Proposal publication date: October 14, 2011

For further information, please call: (512) 305-8303

7 TAC §116.17

The Texas State Securities Board adopts new §116.17, concerning custody of clients' funds or securities by registered investment advisers, with changes to the proposed text as published in the October 14, 2011, issue of the Texas Register (36 TexReg 6833). In subsection (a)(6), "an" was changed to "a" and subsection (b)(2) was changed to insert the subject, "the investment adviser," and to change the tense of the verb accordingly.

The Agency and the public will be provided with better information about investment advisers' custodial practices and safeguards established for clients' funds and securities in the custody of an investment adviser.

Advisory client assets will be less subject to loss, misuse, or misappropriation. While the rule would not prevent all fraudulent activities by investment advisers or custodians, it should, together with an increased focus on the safekeeping of client assets, help deter fraudulent conduct, and increase the likelihood that fraudulent conduct will be detected earlier so that client losses could be minimized.

No comments were received regarding adoption of the new rule.

The new rule is adopted under Texas Civil Statutes, Article 581-28-1. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes.

The adopted rule affects Texas Civil Statutes, Articles 581-13-1 and 581-14.

§116.17.Custody of Funds or Securities of Clients by Registered Investment Advisers.

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Audit--when used in regard to financial statements, an examination of the financial statements by an independent accountant in accordance with generally accepted auditing standards, as may be modified or supplemented by the Board, for the purpose of expressing an opinion thereon.

(2) Control--the power, directly or indirectly, to direct the management or policies of a person, whether through ownership of securities, by contract, or otherwise. Control includes:

(A) each of the investment adviser's officers, partners, or directors exercising executive responsibility (or persons having similar status or functions) is presumed to control the firm;

(B) a person is presumed to control a corporation if the person:

(i) directly or indirectly has the right to vote 25% or more of a class of the corporation's voting securities; or

(ii) has the power to sell or direct the sale of 25% or more of a class of the corporation's voting securities;

(C) a person is presumed to control a partnership if the person has the right to receive upon dissolution, or has contributed, 25% or more of the capital of the partnership;

(D) a person is presumed to control a limited liability company if the person:

(i) directly or indirectly has the right to vote 25% or more of a class of the interests of the limited liability company;

(ii) has the right to receive upon dissolution, or has contributed, 25% or more of the capital of the limited liability company; or

(iii) is an elected manager of the limited liability company; or

(E) a person is presumed to control a trust if the person is a trustee or managing agent of the trust.

(3) Custody--holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them. The investment adviser has custody if a related person holds, directly or indirectly, client funds or securities, or has any authority to obtain possession of them, in connection with advisory services the investment adviser provides to clients. Custody includes:

(A) possession of client funds or securities (but not of checks drawn by clients and made payable to third parties) unless the investment adviser receives them inadvertently and returns them to the sender promptly but in any case within three business days of receiving them;

(B) 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 investment adviser's instruction to the custodian; and

(C) any capacity (such as general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives the investment adviser or its supervised person legal ownership of or access to client funds or securities.

(4) Independent public accountant--a public accountant that meets the standards of independence described in Securities and Exchange Commission, Rule 2-01(b) and (c) of Regulation S-X (17 CFR §210.2-01(b) and (c)) as existed on April 1, 2010.

(5) Independent representative--a person that:

(A) acts as agent for an advisory client, including in the case of a pooled investment vehicle, for limited partners of a limited partnership (or members of a limited liability company, or other beneficial owners of another type of pooled investment vehicle) and by law or contract is obliged to act in the best interest of the advisory client or the limited partners (or members, or other beneficial owners);

(B) does not control, is not controlled by, and is not under common control with the investment adviser; and

(C) does not have, and has not had within the past two years, a material business relationship with the investment adviser.

(6) Open-end company--a management company which is offering for sale or has outstanding any redeemable security of which it is the issuer.

(7) Operationally independent--for purposes of subsection (c)(6) of this section, a related person is presumed not to be operationally independent unless each of the following conditions is met and no other circumstances can reasonably be expected to compromise the operational independence of the related person:

(A) client assets in the custody of the related person are not subject to claims of the adviser's creditors;

(B) advisory personnel do not have custody or possession of, or direct or indirect access to client assets of which the related person has custody, or the power to control the disposition of such client assets to third parties for the benefit of the adviser or its related persons, or otherwise have the opportunity to misappropriate such client assets;

(C) advisory personnel and personnel of the related person who have access to advisory client assets are not under common supervision; and

(D) advisory personnel do not hold any position with the related person or share premises with the related person.

(8) Qualified custodian--

(A) a bank as defined in the Investment Advisers Act of 1940, §202(a)(2), or a savings association as defined in the Federal Deposit Insurance Act, §3(b)(1), that has deposits insured by the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act;

(B) a broker-dealer registered under the Securities Exchange Act of 1934, §15(b)(1), holding the client assets in customer accounts;

(C) a futures commission merchant registered under the Commodity Exchange Act, §4f(a), 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

(D) 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.

(9) Related person--any person, directly or indirectly, controlling or controlled by the investment adviser, and any person that is under common control with the investment adviser.

(b) Safekeeping required. No registered investment adviser may have custody of client funds or securities unless:

(1) 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 investment adviser's clients' funds and securities, under the investment adviser's name as agent or trustee for the clients.

(2) Notice to clients. If the investment adviser opens an account with a qualified custodian on behalf of the client, either under the client's name or under the investment adviser's name as agent, the investment adviser notifies 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. If the investment adviser sends account statements to a client to which the investment adviser is required to provide this notice, the investment adviser includes in the notification provided to that client and in any subsequent account statement the investment adviser sends that client, a statement urging the client to compare the account statements from the custodian with those from the investment adviser.

(3) Account statements to clients. The investment adviser has a reasonable basis, after due inquiry, 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.

(4) Independent verification. The client funds and securities of which the investment adviser has custody are verified by actual examination at least once during each calendar year, except as provided below, by an independent public accountant, pursuant to a written agreement between the investment adviser and the accountant, at a time that is chosen by the accountant without prior notice or announcement to the investment adviser and that is irregular from year to year. The written agreement must provide for the first examination to occur within six months of becoming subject to this paragraph, except that, if the investment adviser maintains client funds or securities pursuant to this section as a qualified custodian, the agreement must provide for the first examination to occur no later than six months after obtaining the internal control report. The written agreement must require the accountant to:

(A) file a certificate on Form ADV-E with the Securities Commissioner within 120 days of the time chosen by the accountant in paragraph (4) of this subsection, stating that it has examined the funds and securities and describing the nature and extent of the examination;

(B) upon finding any material discrepancies during the course of the examination, notify the Securities Commissioner 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 Director of the Inspections and Compliance Division; and

(C) upon resignation or dismissal from, or other termination of, the engagement, or upon removing itself or being removed from consideration for being reappointed, file with the Securities Commissioner within four business days Form ADV-E accompanied by a statement that includes:

(i) the date of such resignation, dismissal, removal, or other termination, and the name, address, and contact information of the accountant; and

(ii) an explanation of any problems relating to examination scope or procedure that contributed to such resignation, dismissal, removal, or other termination.

(5) Special rule for limited partnerships and limited liability companies. If the investment adviser or a related person 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 (3) of this subsection must be sent to each limited partner (or member or other beneficial owner).

(6) Investment advisers acting as qualified custodians. If the investment adviser maintains, or if the investment adviser has custody because a related person maintains, client funds or securities pursuant to this subsection as a qualified custodian in connection with advisory services the investment adviser provides to clients:

(A) the independent public accountant the investment adviser retains to perform the independent verification required by paragraph (4) of this subsection must be registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by, the Public Company Accounting Oversight Board in accordance with its rules; and

(B) the investment adviser must obtain, or receive from the investment adviser's related person, within six months of becoming subject to this paragraph and thereafter no less frequently than once each calendar year a written internal control report prepared by an independent public accountant:

(i) the internal control report must include an opinion of an independent public accountant as to whether controls have been placed in operation as of a specific date, and are suitably designed and are operating effectively to meet control objectives relating to custodial services, including the safeguarding of funds and securities held by either the investment adviser or a related person on behalf of the investment adviser's clients, during the year;

(ii) the independent public accountant must verify that the funds and securities are reconciled to a custodian other than the investment adviser or the investment adviser's related person; and

(iii) the independent public accountant must be registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by, the Public Company Accounting Oversight Board in accordance with its rules.

(7) Independent representatives. A client may designate an independent representative to receive, on his or her behalf, notices and account statements as required under paragraphs (2) and (3) of this subsection.

(1) Shares of an open-end company. With respect to shares of an open-end company as defined in this section), the investment adviser may use the open-end company's transfer agent in lieu of a qualified custodian for purposes of complying with subsection (b) of this section.

(2) Certain privately offered securities.

(A) The investment adviser is not required to comply with subsection (b)(1) of this section 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 the 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) of this paragraph, the provisions of this paragraph are available with respect to securities held for the account of a limited partnership (or a limited liability company, or other type of pooled investment vehicle) only if the limited partnership is audited, and the audited financial statements are distributed, as described in paragraph (4) of this subsection.

(3) Fee deduction. Notwithstanding subsection (b)(4) of this section, the investment adviser is not required to obtain an independent verification of client funds and securities maintained by a qualified custodian if:

(A) the investment adviser has custody of the funds and securities solely as a consequence of the investment adviser's authority to make withdrawals from client accounts to pay its advisory fee; and

(B) if the qualified custodian is a related person, the investment adviser can rely on paragraph (6) of this subsection.

(4) Limited partnerships subject to annual audit. The investment adviser is not required to comply with subsection (b)(2) and (b)(3) of this section and the investment adviser shall be deemed to have complied with subsection (b)(4) of this section 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 (as defined in this section):

(A) at least annually and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) within 120 days of the end of its fiscal year;

(B) by an independent public accountant that is registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by, the Public Company Accounting Oversight Board in accordance with its rules; and

(C) upon liquidation and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) promptly after the completion of such audit.

(5) Registered investment companies. The investment adviser is not required to comply with this section with respect to the account of an investment company registered under the Investment Company Act of 1940.

(6) Certain related persons. Notwithstanding subsection (b)(4) of this section, the investment adviser is not required to obtain an independent verification of client funds and securities if:

(A) the investment adviser has custody under this rule solely because a related person holds, directly or indirectly, client funds or securities, or has any authority to obtain possession of them, in connection with advisory services the investment adviser provides to clients; and

(B) the investment adviser's related person is operationally independent of the investment adviser.

(d) Delivery to related person. Sending an account statement under subsection (b)(5) of this section or distributing audited financial statements under subsection (c)(4) of this section shall not satisfy the requirements of this section if such account statements or financial statements are sent solely to limited partners (or members or other beneficial owners) that themselves are limited partnerships (or limited liability companies, or another type of pooled investment vehicle) and are the investment adviser's related persons.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on December 1, 2011.

TRD-201105279

Carla James
Interim Securities Commissioner
State Securities Board

Effective date: December 21, 2011

Proposal publication date: October 14, 2011

For further information, please call: (512) 305-8303

CHAPTER 133. FORMS

7 TAC §133.3

The Texas State Securities Board adopts new §133.3, a form concerning an ADA accommodations request, with changes to the proposed form as published in the October 14, 2011, issue of the Texas Register (36 TexReg 6837). The form has been changed to refer to the "Americans with Disabilities Act of 1990, as amended" to clarify that the disabilities covered are those under the current law. The procedure for requesting accommodations is set out in amendments to §115.3 and §116.3, which have been concurrently adopted.

A form is provided for an examinee with an ADA disability to request accommodations for the Texas Securities Law Examination administered by the Agency.

Examinees with ADA disabilities will be apprised of how to request accommodations to take the Texas securities law examination.

No comments were received regarding adoption of the new rule.

The new rule is adopted under the Texas Occupations Code §54.003 and Texas Civil Statutes, Article 581-28-1. Occupations Code §54.003 provides that agencies shall adopt rules to provide reasonable examination accommodations to examinees diagnosed as having dyslexia for each licensing examination administered by the agency. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes.

The adopted form affects Texas Occupations Code §54.003 and Texas Civil Statutes, Articles 581-13 and 581-19.

§133.3.The State Securities Board Adopts by Reference the ADA Accommodations Request Form.

This form is available from the State Securities Board, P.O. Box 13167, Austin, Texas 78711-3167.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on December 1, 2011.

TRD-201105280

Carla James
Interim Securities Commissioner
State Securities Board

Effective date: December 21, 2011

Proposal publication date: October 14, 2011

For further information, please call: (512) 305-8303

7 TAC §133.33

The Texas State Securities Board adopts an amendment to §133.33, concerning uniform forms accepted, required, or recommended, without changes to the proposed text as published in the October 14, 2011, issue of the Texas Register (36 TexReg 6837).

Form ADV-E, required by adopted new §116.17, has been added to the list of uniform forms accepted, required or recommended by the Board.

A form concerning accounting of client securities and funds in the possession of an investment adviser subject to an annual surprise examination is provided and is expected to assist regulators in conducting inspections by identifying such firms.

No comments were received regarding adoption of the amendment.

The adopted amendment affects Texas Civil Statutes, Articles 581-13-1 and 581-14.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on December 1, 2011.

TRD-201105281

Carla James
Interim Securities Commissioner
State Securities Board

Effective date: December 21, 2011

Proposal publication date: October 14, 2011

For further information, please call: (512) 305-8303

TITLE 7. BANKING AND SECURITIES

PART 7. STATE SECURITIES BOARD CHAPTER 107. TERMINOLOGY

7 TAC §107.2

CHAPTER 115. SECURITIES DEALERS AND AGENTS

7 TAC §115.3

CHAPTER 116. INVESTMENT ADVISERS AND INVESTMENT ADVISER REPRESENTATIVES

7 TAC §116.1

7 TAC §116.3

7 TAC §116.5

7 TAC §116.17

CHAPTER 133. FORMS

7 TAC §133.3

7 TAC §133.33

PART 7. STATE SECURITIES BOARD
CHAPTER 107. TERMINOLOGY