New IA Rules in Washington State

Amendments to Investment Adviser Rules in Washington State

Washington State Department of Financial Institutions has amended the rules governing the registration and activities of investment advisers set forth in Chapter 460-24A WAC. Effective July 13, 2014, the amendments update various provisions, including examination and registration requirements, financial reporting requirements, custody, performance compensation arrangements, books and records requirements, and unethical business practices. There are new rules addressing compliance policies and procedures, proxy voting, and advisory contracts. In addition, there are new exemptions from registration for certain private fund and venture capital fund advisers. The amendments repeal WAC 460-24A-058, which defines when an application is considered filed; and make additional updates, clarifications, and changes to the rules.

The full text of the revised rules can be found here.  Some notable amendments:

Exemptions from Registration for 3(C)(7) Fund Advisers and Venture Capital Fund Advisers

The amendments created a new exemption from registration for investment advisers who provide advisory services solely to one or more qualifying private funds (as defined by the SEC Rule 203(m)-1, but excluding 3(c)(1) funds) or venture capital funds. In order to qualify for this exemption, investment advisers have to satisfy the following requirements: (i) an investment adviser and its affiliates are not subject to disqualification pursuant to WAC 460-44A-505(2)(d); and (ii) an investment adviser has to file with WA Securities Division same reports and amendments as an exempt reporting adviser is required to file with the SEC. The filings must be submitted electronically through IARD.

Compliance Policies and Procedures

The amendments codified the requirement that investment advisers registered or required to be registered in WA adopt and implement written compliance procedures designed to prevent violation of the securities laws.  Investment advisers must review the procedures at least annually, and designate an individual administering the adopted code of ethics.

Proxy Voting

The amendments make it unlawful for an investment adviser registered or required to be registered in WA to exercise voting authority with respect to client securities absent: (1) the implementation of written policies and procedures designed to ensure proxy voting will be in the best interests of clients and include how to address material conflicts that may arise between the investment adviser and the clients; (2) disclose to clients how they may obtain information on the investment adviser voted with respect to their securities; and (3) describe to clients the proxy voting policies and procedures, and provide a written copy upon request.

Financial Reporting Requirements

The amendments created the following financial reporting requirements for investment advisers:

(1) An investment adviser with custody of client accounts must submit an audited balance sheet within 120 days of the end of the adviser’s fiscal year. Each balance sheet must be prepared in conformity with generally accepted accounting principles, audited by an independent certified public accountant, and accompanied by an audit opinion of the accountant.
(2) An investment adviser with custody of client accounts that manages pooled investment vehicles must provide audited financial statements of each pooled investment vehicle of which the investment adviser is a general partner (or comparable position) within 120 days of the end of the pooled investment vehicle’s fiscal year.
(3) An investment adviser who does not have custody of client accounts must submit a yearly unaudited balance sheet within 120 days of the end of the adviser’s fiscal year.

New Custody Requirements for Investment Advisers that Manage a Pooled Investment Vehicle

The amendments created new safekeeping and reporting requirements for investment advisers that manage a pooled investment vehicle. Such advisers must: (a) enter into a written agreement with an independent party to review all fees, expenses, and capital withdrawals from the pooled accounts and approve all payments; or (b) provide audited financial statements of the pooled investment vehicle to all limited partners within 120 days of the end of the pooled investment vehicle’s fiscal year. Further, investment advisers that manage a pooled investment vehicle must deliver account statements at least quarterly to all limited partners in accordance with WAC 460-24A-105 and include the following information:

(1) The total amount of all additions to and withdrawals from the fund as a whole, as well as the opening and closing net asset value of the fund at the end of the quarter;
(2) listing of the fund’s long and short positions on the closing date of the statement; and
(3) The total amount of additions to and withdrawals from the fund by the investor, as well as the total value of the investor’s interest in the fund at the end of the quarter.


Washington state investment advisors should review their practice to determine if they must implement new procedures in order to comply with the amendments. For individuals who are considering becoming an investment adviser in Washington, it will be important to review the new examination and registration requirements.  If you have any questions or would like assistance, please contact us.

Cole-Frieman & Mallon LLP provides legal services for hedge fund managers and other groups within the investment management industry.  Bart Mallon can be reached directly at 415-868-5345.

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