The Colorado Division of Securities (“Division”) has adopted new and amended rules (collectively the “Rules”) applicable to certain Colorado investment advisers and their representatives, effective as of March 30, 2023 (the “Effective Date”).
The new rules primarily affect investment advisers registered with the Colorado Division of Securities (such advisers, “Colorado Licensed Advisers”) and investment advisers registered with the U.S. Securities and Exchange Commission (such advisers, “SEC Registered Advisers”) that have one or more Colorado-based Investment Adviser Representatives (“IARs”). To a lesser degree, however, the amended rules also impact investment advisers who are excluded or excepted from Colorado registration.[1] In addition, the newly adopted rules under the Colorado Securities Act (the “Colorado Act”) include a new continuing education requirement for IARs under Rule 51-4.4.1(IA) (the “Continuing Education Rule”) and a new compliance program requirement under Rule 51-4.12(IA) (the “Compliance Rule”) for Colorado Licensed Advisers to adopt, implement, and enforce written policies and procedures to address the performance of certain fiduciary and substantive obligations under the Colorado Act. The new Compliance Rule also requires each Colorado Licensed Adviser to designate a chief compliance officer and conduct an annual review of its compliance policies and procedures.[2] Lastly, amendments concerning an adviser’s maintenance of books and records under Rule 51-4.6(IA), the requirements of advisory contracts under Rule 51-4.8(IA)(P), mandatory disclosures related to Form ADV Part 2 under Rule 51-4.7(IA), and other clarifying edits, were also adopted on the Effective Date (collectively the “Amended Rules”).[3] Although the bulk of the Rules are verbatim adoptions of the model rules of the North American Securities Administrators Association (“NASAA”) they contain substantive changes that may result in new compliance requirements for investment advisers and their IARs.
Part 1 of this three-part series focuses on the new Continuing Education Rule and offers practical guidance to advisers and their IARs for meeting the new requirements. Part 2 will provide a comprehensive analysis of the new Compliance Rule, and offer concrete recommendations to Licensed Advisers for their compliance programs. Part 3 will review the Amended Rules as a whole and provide best practices and compliance recommendations going forward.
The Continuing Education Rule
Rule 51-4.4.1(IA) adds a new continuing education requirement for all licensed Investment Adviser Representatives.[4] IARs must attain at least twelve (12) Credits each twelve-month (12) Reporting Period to maintain IAR registration.[5] A “Credit” means a unit that NASAA or its designee has designated as at least 50 minutes of educational instruction. So, all in all, IARs are required to complete at least ten (10) 60-minute hours of continuing education. Of the twelve (12) Credits, there is a products and practices component and an ethics component. IARs must complete six (6) Credits of products and practice content and six (6) Credits of regulatory and ethics content with at least three (3) hours dedicated solely to ethics. While an IAR may take more than twelve (12) Credits in a single Reporting Period to satisfy the previous Reporting Period’s deficiency, the IAR may not “carry forward” continuing education Credits above that Reporting Period’s amount into a subsequent Reporting Period.
IARs are expected to self-manage finding, completing, and passing continuing education courses from an Authorized Provider. Documentation of course completion is a shared responsibility between an Authorized Provider and the IAR. An IAR who fails to obtain the required twelve (12) Credits by the end of Reporting Period will renew the IAR license as “CE Inactive” and will remain in “CE Inactive” status until they fulfill all required Credits. “CE Inactive” status will appear publicly on the Investment Adviser Public Disclosure (“IAPD”) and FINRA’s BrokerCheck tool. An IAR who remains “CE inactive” at the close of the following calendar year is not eligible for IAR licensing or renewal of an IAR license. No exemptions or waivers are available based on experience or other qualifications, but the Commissioner may discretionarily waive any Rule requirements.
In Colorado, all IARs with a Colorado nexus must be licensed with the Division, whether they are employed or act on behalf of an SEC Registered Adviser that conducts advisory business in the state or a Colorado Licensed Adviser.[6] The new Rule addresses the reality of multi-state registered IARs, providing that IARs who are registered or licensed in multiple states may receive reciprocity in Colorado for their compliance with continuing education requirements in the IAR’s “Home State” so long as the Home State’s requirements are at least as stringent as the Colorado Continuing Education Rule and the IAR is otherwise in compliance with the Home State’s requirements. Similarly, dual-registrant IARs, those IARs who, in addition to state licensing, are also registered as an agent of a Financial Industry Regulatory Authority (“FINRA”) member broker-dealer, may receive reciprocity for their compliance with FINRA’s continuing education requirements so long as the FINRA continuing education content meets NASAA’s baseline criteria.
The first Reporting Period is expected to begin in 2024, and the Division is expected to provide further information to firms.
Takeaways for the Continuing Education Rule
- Get to Know FINRA’s FinPro System: IARs should immediately familiarize themselves with FINRA’s Financial Professional Gateway system (FinPro), which IARs must use to monitor and report their Credits.[7]
- Compliance Reminders for Continuing Education Requirements: Even though it is the IAR’s responsibility to earn the required continuing education Credits, it is the advisory firm’s responsibility to ensure that all its personnel are appropriately licensed.[8] Firms should consider implementing a system for reminding IARs of upcoming compliance deadlines. This could help avoid non-registration mishaps and avoid last-minute scrambles to complete the requirements at the last minute by, for example, encouraging IARs to spread out continuing education throughout the Reporting Period.
- Understand the Passing Requirements: Per NASAA, every course must have an assessment of at least ten questions. There is also a requirement that IARs pass assessments with a score of at least 70% within no more than three attempts.
Conclusion
With the Continuing Education Rule, Colorado has for the first time imposed a continuing education requirement for IARs that must be satisfied every year going forward to remain licensed. An IAR’s failure to acknowledge and abide by the requirements could negatively impact his or her registration status. Additional guidance may be forthcoming from the Colorado Division of Securities. In the meantime, NASAA has published some FAQs that clarify the mechanics of the continuing education requirement generally.[9]
Should you have a question about the contents of this article please contact Peter Schwartz, Martine Ventello, or any other member of the DGS Asset Management team.
[1] In particular, those venture capital funds and private equity funds relying on the Colorado private fund adviser licensing exemption in Rule 51-4.11(IA). The second article in this series will address the scope of the new rule in that context.
[2] See Rule 51-4.12(IA)(C); Rule 51-4.4.1(IA)(B).
[3] See https://securities.colorado.gov/statutes-and-rules-2 and the Division’s accompanying release at https://securities.colorado.gov/press-release/alert-new-colorado-securities-rules-effective-today for more details.
[4] Under C.R.S.§ 11-51-201(9.6), investment adviser representatives are defined as “individuals who have a place of business in this state; who is a partner, officer, or director of an investment adviser; who occupies a status similar to or performs functions similar to those of a partner, officer, or director for an investment adviser; or who is employed or otherwise associated with an investment adviser who: (I) Makes recommendations or otherwise renders advice to clients regarding securities; (II) Manages securities accounts or portfolios for clients; (III) Determines which recommendation or advice regarding securities should be given to clients; or (IV) Supervises employees of, or persons otherwise associated with, an investment adviser or a federal covered adviser who perform any of the duties specified in this paragraph (a).”
[5] Under the Rule, a “Reporting Period” is one twelve-month (12) period as determined by NASAA, measured from the first day of the first full Reporting Period after the individual is licensed or required to be licensed with the State of Colorado.
[6] Colorado uses the Term “Federal Covered Adviser,” which means a person who is registered or required to be registered under Section 203 of the Investment Advisers Act of 1940. See C.R.S. § 11-51-201(5.5)(a).
[7] FINRA’s FinPro System can be found at: https://www.finra.org/registration-exams-ce/finpro
[8] See Colorado Division of Securities Investment Adviser Guide (Volume I), October 28, 2021, at p. 12 (“It is the firm’s responsibility to ensure that all individuals are properly licensed.”)
[9] NASAA’s FAQs can be found at: https://www.nasaa.org/industry-resources/investment-advisers/resources/iar-ce-faq/