§ 303.042. Investment adviser capital requirements.

 (a)  Every investment adviser registered under section 301 of the act (70 P. S. §  1-301) shall maintain at all times the following net worth requirements:

   (1)  The following applies when an investment adviser has its principal place of business in a state other than this Commonwealth.

     (i)   If the investment adviser currently is licensed as an investment adviser in the state in which it maintains its principal place of business and is in compliance with that state’s net worth requirements, the net worth required by this section shall be the same as the net worth requirement imposed by that state.

     (ii)   If the investment adviser currently is not licensed as an investment adviser in the state in which it maintains its principal place of business, the net worth required by this section shall be the same as if the investment adviser had its principal place of business in this Commonwealth.

   (2)  Except as provided in subsection (e), an investment adviser that has its principal place of business in this Commonwealth and also is registered as a broker-dealer under section 301 of the act shall maintain at all times a minimum net capital of $25,000.

   (3)  An investment adviser that has its principal place of business in this Commonwealth and has custody of client funds or securities shall maintain at all times a minimum net worth of $35,000 unless the investment adviser meets any of the following:

     (i)   The investment adviser has custody solely as a result of receiving fees directly deducted from clients’ funds or securities if the investment adviser:

       (A)   Possesses written authorization from the client to deduct advisory fees from an account held by a qualified custodian.

       (B)   Sends the qualified custodian written notice of the amount of the fee to be deducted from the client’s account.

       (C)   Sends the client a written invoice itemizing the fee, including any formulae used to calculate the fee, the time period covered by the fee and the amount of assets under management on which the fee was based.

     (ii)   The investment adviser has custody solely as a result of serving as a general partner, manager of a limited liability company or a person occupying a similar status or performing a similar function which gives the investment adviser or its supervised person legal ownership or access to client funds or securities if:

       (A)   The pooled investment vehicle is subject to audit at least annually and distributes its audited financial statements which have been prepared by an independent certified public accountant in accordance with generally accepted accounting principles to all limited partners, members or beneficial owners within 120 days of the end of its fiscal year.

       (B)   The investment adviser:

         (I)   Hires an independent party to review all fees, expenses and capital withdrawals from the accounts included in the pooled investment vehicle prior to forwarding them to the qualified custodian with the independent party’s approval for payment.

         (II)   Sends written invoices or receipts to the independent party which describe the amount of the fees (including any formulae used to calculate the fees, the time period covered by the fees and the amount of assets under management on which the fees were based), expenses or capital withdrawals for the independent party to verify that payment of the fees, expenses or capital withdrawals is in accordance with the documents governing the operation of the pooled investment vehicle and any statutory requirements applicable thereto.

     (iii)   The investment adviser has custody solely as a result of acting as trustee for a beneficial trust in which the beneficial owners of the trust are a parent or step-parent; grandparent or step-grandparent; spouse, brother or step-brother, sister or step-sister; or grandchild or step-grandchild of the investment adviser.

   (4)  An investment adviser that has its principal place of business in this Commonwealth and has discretionary authority over client funds or securities but does not have custody of client funds or securities shall maintain at all times a minimum net worth of $10,000. An investment adviser will not be deemed to be exercising discretion and subject to the requirements of this paragraph when it places trade orders with a broker-dealer under a third-party trading agreement if:

     (i)   The investment adviser has executed a separate investment adviser contract exclusively with its clients that acknowledges that a third-party agreement will be executed to allow the investment adviser to effect securities transactions for the client in the client’s broker-dealer account.

     (ii)   The investment adviser contract specifically states that the client does not grant discretionary authority to the investment adviser and the investment adviser, in fact, does not exercise discretion with respect to the account.

     (iii)   A third-party trading agreement is executed between the investment adviser, the client and the broker-dealer which specifically limits the investment adviser’s authority in the client’s broker-dealer account to the placement of trade orders and deduction of investment adviser fees.

   (5)  An investment adviser that has its principal place of business in this Commonwealth and accepts prepayment of advisory fees of more than 6 months in advance and more than $1,200 per client shall maintain at all times a positive net worth.

 (b)  As condition of the right to continue to transact business in this Commonwealth, an investment adviser registered under the act shall notify, by the close of business on the next business day, the Commission if the investment adviser’s total net worth is less than the minimum required net worth. Within 24 hours after transmitting the notice, the investment adviser shall file a report of its financial condition including the following:

   (1)  A proof of money balances of ledger accounts in the form of a trial balance.

   (2)  A computation of net worth.

   (3)  An analysis of clients’ securities and funds which are not segregated.

   (4)  A computation of the aggregate amount of clients’ ledger debit balances.

   (5)  A computation of the aggregate amount of clients’ ledger credit balances.

   (6)  A statement as to the number of client accounts.

 (c)  For the purpose of this section, the following terms have the following meanings:

   Custody—A person is deemed to have custody of client funds or securities if the person directly or indirectly holds clients funds or securities, has any authority to obtain possession of them or has the ability to appropriate them.

   Independent party—A person who meets all of the following requirements:

     (i)   Is engaged by an investment adviser with respect to payment of fees, expenses or capital withdrawals from a pooled investment vehicle in which the investment adviser has custody solely as a result of serving as a general partner, manager of a limited liability company or a person occupying a similar status or performing a similar function which gives the investment adviser or its supervised person legal ownership or access to client funds or securities.

     (ii)   Does not control, is not controlled by and is not under common control with the investment adviser.

     (iii)   Within the preceding consecutive 12 month period, did not derive 5% or more of its gross revenues from the investment adviser who hired the person to be an independent party, including the amount to be received from the investment adviser under the terms of the independent party engagement.

   Net capital—The meaning set forth in 17 CFR 240.15c3-1 (relating to net capital requirements for brokers or dealers), promulgated under the Securities Exchange Act of 1934 (15 U.S.C.A. § §  78a—78kk).

   Net worth—The excess of assets over liabilities as determined by generally accepted accounting principles reduced by the following:

     (i)   Prepaid expenses except items properly classified as current assets under generally accepted accounting principles.

     (ii)   Deferred charges.

     (iii)   Goodwill, franchises, organizational expenses, patents, copyrights, marketing rights, unamortized debt discount and expense and all other assets of an intangible nature.

     (iv)   Home furnishings, automobiles and any other personal items not readily marketable in the case of an individual.

     (v)   Advances or loans to stockholders and officers in the case of a corporation; members and managers in the case of a limited liability company; and advances or loans to partners in the case of a partnership.

   Pooled investment vehicle—

     (i)   A limited partnership, limited liability company or an entity with a similar legal status and performing similar functions.

     (ii)   The term does not include an investment company that has filed a registration statement under the Investment Company Act of 1940 (15 U.S.C.A. § §  80a-1—80a-64).

   Principal place of business—The meaning set forth in 17 CFR 275.203A-3(c) (relating to definitions) promulgated under the Investment Advisers Act of 1940 (15 U.S.C.A § §  80b-1—80b-21).

   Qualified custodian—The following shall be considered qualified custodians for purposes of this section:

     (i)   A bank as that term is defined in section 102(d) of the act (70 P. S. §  1-102(d)).

     (ii)   A Federally covered adviser as that term is defined in section 102(f.1) of the act.

     (iii)   A broker dealer registered with the Commission under section 301 of the act (70 P. S. §  1-301).

   Supervised person—A person who meets the definition in section 202(a)(25) of the Investment Advisers Act of 1940 (15 U.S.C.A. §  80b-2(a)(25)).

 (d)  For investment advisers registered or required to be registered under the act, the Commission may require that a current appraisal be submitted to establish the worth of an asset being calculated under the net worth formulation.

 (e)  The requirements of subsection (a)(2) do not apply to an investment adviser that has its principal place of business in this Commonwealth and also is registered as a broker-dealer under section 15 of the Securities Exchange Act of 1934 (15 U.S.C.A. §  77o) if the broker-dealer is one of the following:

   (1)  Subject to, and in compliance with, SEC Rule 15c3-1.

   (2)  A member of a National Securities Exchange whose members are exempt from SEC Rule 15c3-1 under subsection (b)(2) thereof and the broker-dealer is in compliance with all rules and practices of the exchange imposing requirements with respect to financial responsibility and the segregation of funds or securities carried for the account of customers.

   The provisions of this §  303.042 issued under the Pennsylvania Securities Act of 1972 (70 P. S. § §  1-101—1-704); amended under sections 303(a)—(e) and 609(a) of the Pennsylvania Securities Act of 1972 (70 P. S. § §  1-303(a)—(e) and 1-609(a)).

   The provisions of this §  303.042 adopted March 29, 1974, effective March 30, 1974, 4 Pa. B. 582; amended June 18, 1982, effective June 19, 1982, 12 Pa.B. 1873; amended June 26, 1987, effective June 27, 1987, 17 Pa.B. 2604; amended September 1, 2000, effective September 2, 2000, 30 Pa.B. 4551; amended April 15, 2005, effective April 16, 2005, 35 Pa.B. 2307. Immediately preceding text appears at serial pages (286711) to (286713).

   This section cited in 64 Pa. Code §  303.051 (relating to surety bonds); and 64 Pa. Code §  304.012 (relating to investment adviser required records).