On November 3, 2023, the United States Forest Service announced a proposed amendment to its special use regulations at 36 C.F.R. part 251 to allow the Forest Service to review and process applications for carbon capture and storage beneath National Forest System Lands.

The Forest Service’s special use regulations set forth screening criteria that a proponent for a special use permit must meet. An existing screening criterion at 36 C.F.R. § 251.54(e)(1)(iv) does not allow the Forest Service to authorize exclusive and perpetual use and occupancy of National Forest System lands for any purpose. The proposed rule would create an express exception to this prohibition by stating that “the Forest Service may authorize exclusive and perpetual use and occupancy for carbon capture and storage in subsurface pore spaces.”

The proposed rule would also define “carbon capture and storage” as “the capture, transportation, injection, and storage of carbon dioxide in subsurface pore spaces in such a manner as to qualify the carbon dioxide stream for the exclusion from classification as a ‘hazardous waste’ pursuant to United States Environmental Protection Agency regulations at 40 CFR 261.4(h).” This definition would specify that carbon capture and storage does not constitute a hazardous waste and therefore is not subject to the prohibition against authorizing storage of hazardous substances on National Forest System lands at 36 C.F.R. § 251.54(e)(1)(ix).

The proposed rule would not affect the U.S. Environmental Protection Agency’s authority to regulate and permit the underground injection and storage of carbon through its Class VI Underground Injection Control program.

The Forest Service is accepting public comment on the proposed rule through January 2, 2024. Procedures for commenting are outlined in the Federal Register notice.

The Corporate Transparency Act (the “CTA”) was enacted on January 1, 2021[1] in an effort by Congress to prevent and combat money laundering, terrorist financing, tax fraud, and other illicit activities by imposing new disclosure requirements on certain companies formed or doing business in the U.S. On September 29, 2022, the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued final regulations to implement Section 6403 of the CTA (the “Final CTA Rules”)[1]. Under the Final CTA Rules, certain entities—referred to as “reporting companies”—will be required to submit specified information about the reporting company, its beneficial owners and company applicants to FinCEN.

Below is a high-level overview of the key provisions and implications of the Final CTA Rules. For further details and legal counsel, please do not hesitate to contact a Davis Graham Partner.

What is a “reporting company”?

A “reporting company” includes (i) any corporation, limited liability company, and any other form of entity created by filing with a secretary of state or similar office under the laws of a state or Indian tribe (referred to as “domestic reporting companies”), and (ii) any corporation, limited liability company, and any other form of entity created under the laws of a foreign country and registered to conduct business in the U.S. or tribal jurisdiction (referred to as “foreign reporting companies”).

What entities are outside of the definition of “reporting company”?

To fall under the definition of a “reporting company,” the entity must have been created or qualified to do business by the filing of a document with a secretary of state or similar official. Accordingly, sole proprietorships, common law trusts, and general partnerships do not currently fall under the definition of “reporting company.” Trusts that are created by a filing, such as statutory or business trusts, however, will be subject to the CTA reporting requirements.

The Final CTA Rules provide 23 categories of exemptions from the “reporting company” definition, including public companies, large operating companies, subsidiaries of certain other exempt entities, inactive entities, pooled investment vehicles, and nonprofit organizations. See the Appendix attached hereto for a summary of each of the 23 exemptions.

Note that the applicability of an exemption will be an ongoing determination—if an entity no longer qualifies under an exemption, it will become a reporting company and be required to promptly file a report.

If my entity is a “reporting company,” what information is required to be submitted to FinCEN?

Each reporting company will be required to report the following for itself: (i) full legal name; (ii) trade name or DBA; (iii) street address of principal place of business or, for a foreign reporting company, its primary location in the U.S.; (iv) jurisdiction of formation and, for a foreign reporting company, the state or tribal jurisdiction in which it is registered; and (v) tax identification number or, for a foreign reporting company that doesn’t have a tax identification number, other unique tax ID number.

Reporting companies will be required to report the following for each individual that is a beneficial owner or company applicant with respect to such reporting company: (i) full legal name; (ii) date of birth; (iii) current residential or, for company applicants, business street address; (iv) unique identifying number from an acceptable identification document (e.g., a non-expired passport or driver’s license) or FinCEN identifier; and (v) an image of the document from which the identifying number was obtained.

Who qualifies as a “beneficial owner”?

A beneficial owner is any individual that, directly or indirectly, either:

• owns or controls at least 25% of the total ownership interests of the reporting company, calculated as they stand at the time of the calculation and on a fully diluted basis, or
• exercises substantial control over the reporting company.

An individual is deemed to have “substantial control” if such individual (i) serves as a senior officer of the reporting company; (ii) has authority over the appointment or removal of any senior officer or a majority of the board of directors; (iii) directs, determines or has substantial influence over, important decisions made by the reporting company; or (iv) exerts similar control.

The Final CTA Rules also describe five types of individuals that are exempt from the definition of “beneficial owner.” Note that there is no limit on the number of beneficial owners a reporting entity might have.

Who is a “company applicant”?

A company applicant is the individual directly responsible for creating or registering the reporting company, and, if different, the individual who is primarily responsible for directing or controlling the filing. Each reporting company formed after January 1, 2024 will have at least one, but not more than two, company applicants.

What are the deadlines for submitting reports?

• Existing Companies – Reporting companies created before January 1, 2024 must file their initial reports by January 1, 2025. Note that reporting companies formed prior to January 1, 2024 do not need to report information about company applicants.
• Companies formed after January 1, 2024 – Reporting companies created after January 1, 2024 must file their initial reports by the earlier of: (i) 30 calendar days[2] of the date the reporting company receives actual notice of its creation or registration, and (ii) the date on which the secretary of state or similar office provides public notice of the reporting company’s existence or registration.
• Entities that no longer qualify for an exemption – Entities that were once exempt but that no longer qualify for any exemptions must file their initial reports within 30 calendar days after the date that they no longer meet the criteria for any exemptions.
• Updates and Corrections – If there are changes or inaccuracies in previously reported information, the reporting company must file an updated report to FinCEN no later than 30 days after it becomes aware of the change or of the inaccuracy.

What are the penalties for non-compliance?

The Final CTA Rules impose penalties for willful violations by individuals and entities. Such violations include willfully reporting or attempting to report false or fraudulent information to FinCEN or willfully failing to complete or update reports to FinCEN. Each violation is subject to penalties of $500 per day up to $10,000 per violation, and possible jail time (up to two years).

How do reporting companies file reports and who will have access to the submitted reports?

Reporting companies will need to file their reports through a secure filing system on FinCEN’s website, which will be available on January 1, 2024.

FinCEN is mandated to maintain reported information confidentially, accessible only to select federal, state, or foreign agencies for investigative and enforcement purposes, as well as financial institutions requesting this information to facilitate compliance with customer due diligence regulations, with the consent of the reporting company.

[1] FinCEN Issues Final Rule for Beneficial Ownership Reporting to Support Law Enforcement Efforts, Counter Illicit Finance, and Increase Transparency (Adopting Release)

[2] On September 28, 2023, FinCEN issued a Notice of Proposed Rulemaking that would extend this filing deadline for reporting companies created or registered on or after January 1, 2024 but prior to January 1, 2025. Those entities would have 90 days following notice of the reporting company’s creation or registration to submit its initial report. The 30-day timeline would continue to apply to reporting companies formed on or after January 1, 2025.

APPENDIX – SUMMARY OF EXEMPTIONS FROM THE “REPORTING COMPANY” DEFINITION

1. Securities reporting issuer: Any entity that is (i) an issuer of a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”) or (ii) required to file supplementary and periodic reports under Section 15(d) of the Exchange Act.
2. Governmental authority: Any entity that (i) is established under the laws of the United States, an Indian tribe, a state, or a political subdivision of a state, or under an interstate compact between two or more states and (ii) exercises governmental authority on behalf of the US or any such Indian tribe, state, or political subdivision.
3. Bank: Any bank, as defined in Section 3 of the Federal Deposit Insurance Act, Section 2(a) of the Investment Company Act of 1940 (the “1940 Act”), or Section 202(a) of the Investment Advisers Act of 1940 (the “IAA”).
4. Credit union: Any federal credit union or state credit union, as defined in Section 101 of the Federal Credit Union Act.
5. Depository institution holding company: Any (i) bank holding company, as defined in Section 2 of the Bank Holding Company Act of 1956, or (ii) savings and loan holding company, as defined in Section 10(a) of the Home Owners’ Loan Act.
6. Money services business: Any money transmitting business or money services business registered with FinCEN under 31 U.S.C. 5330 or 31 CFR 1022.380, respectively.
7. Broker or dealer in securities: Any broker or dealer as defined Section 3 of the Exchange Act that is registered under Section 15 of the Exchange Act.
8. Securities exchange or clearing agency: Any exchange or clearing agency as defined in Section 3 of the Exchange Act that is registered under Sections 6 or 17A of the Exchange Act.
9. Other Exchange Act-registered entity: Any other entity not described in exemptions 1, 7 or 8 that is registered with the Securities and Exchange Commission (the “SEC”) under the Exchange Act.
10. Investment company or investment adviser: Any entity that is (i) an investment company as defined in Section 3 of the 1940 Act or an investment adviser as defined in Section 202 of the IAA, and (ii) registered with the SEC under the 1940 Act or the IAA.
11. Venture capital fund adviser: Any investment adviser that (i) is described in Section 203(l) of the IAA and (ii) has filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the SEC.
12. Insurance company: Any insurance company, as defined in Section 2 of the 1940 Act.
13. State-licensed insurance producer: Any entity that (i) is an insurance producer that is authorized by a state and subject to supervision by the insurance commissioner or a similar official or agency of a state and (ii) has an operating presence at a physical office within the United States.
14. Commodity Exchange Act-registered entity: Any entity that is (a) a registered entity, as defined in Section 1a of the Commodity Exchange Act (the “Commodity Act”), or (b) (i) a futures commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, or commodity trading advisor, as defined in Section 1a of the Commodity Act, or a retail foreign exchange dealer, as described in Section 2(c)(2)(B) of the Commodity Act, and (ii) registered with the Commodity Futures Trading Commission under the Commodity Act.
15. Accounting firm: Any public accounting firm registered in accordance with Section 102 of the Sarbanes-Oxley Act of 2002.
16. Public utility: Any entity that is a regulated public utility, as defined in Section 7701(a)(33)(A) of the Internal Revenue Code of 1986 (the “Code”), that provides telecommunications services, electrical power, natural gas, or water and sewer services within the United States.
17. Financial market utility: Any financial market utility designated by the Financial Stability Oversight Council under Section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010.
18. Pooled investment vehicle: Any pooled investment vehicle that is operated or advised by a person described in exemptions 3, 4, 7, 10 or 11.
19. Tax-exempt entity: Any entity that is (i) an organization that is described in Section 501(c) of the Code (determined without regard to Section 508(a) of the Code) and exempt from tax under Section 501(a) of the Code (with a 180 day grace period if an organization ceases to meet the foregoing parameters), (ii) a political organization, as defined in Section 527(e)(1) of the Code, that is exempt from tax under Section 527 of the Code or (iii) a charitable trust or split-interest trust, as described in paragraph (1) or (2) of Section 4947(a) of the Code.
20. Entity assisting a tax-exempt entity: Any entity that (i) operates exclusively to provide financial assistance to, or hold governance rights over, any entity described in exemption 19, (ii) is a United States person, (iii) is beneficially owned or controlled exclusively by one or more United States persons that are United States citizens or permanent residents and (iv) derives at least a majority of its funding or revenue from one or more United States persons that are United States citizens or permanent residents.
21. Large operating company: Any entity that (i) employs more than 20 full time employees in the United States, (ii) has an operating presence at a physical office within the United States and (iii) filed a federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales, as reported as gross receipts or sales (net of returns and allowances) on the entity’s income tax return (excluding gross receipts or sales from sources outside of the United States), which for an entity that is part of an affiliated group of corporations within the meaning of 26 U.S.C. 1504 that filed a consolidated return shall be the amount reported on the consolidated return for such group.
22. Subsidiary of certain exempt entities: Any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more entities described in exemptions 1 through 5, 7 through 17, 19, or 21.
23. Inactive entity: Any entity that (i) was in existence on or before January 1, 2020, (ii) is not engaged in active business, (iii) is not directly or indirectly owned in whole or in part by a foreign person, (iv) has not experienced any change in ownership in the preceding 12-month period, (v) has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12-month period and (vi) does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, LLC or other similar entity.

This is the third in a three-part series discussing the new and amended rules (collectively the “Rules”) adopted by the Colorado Division of Securities (“Division”) effective as of March 30, 2023 (the “Effective Date”). The series discusses the new and amended rules under the Colorado Securities Act (the “Colorado Act”) applicable to certain Colorado investment advisers and their registered representatives (“IARs”). Part 3 reviews the Division’s amendments to the requirements of advisory contracts under Rule 51-4.8(IA)(P)[1], mandatory disclosures related to Form ADV Part 2 under Rule 51-4.7(IA) (the “Mandatory Disclosure Rule”), and maintenance of books and records under Rule 51-4.6(IA) (the “Books and Records Rule”) (collectively the “Amended Rules”) and provides best practices and compliance recommendations.

Part 1 of this three-part series focused on the new Continuing Education Rule and offered practical guidance to advisers and their IARs for meeting the new requirements. Part 2 provided a comprehensive analysis of the Compliance Rule, and offered concrete recommendations to investment advisers registered with the State of Colorado (such advisers, “Colorado Licensed Advisers”) for their compliance programs.

Requirements of Advisory Contracts

Rule 51-4.8(IA)(P) was amended to clarify the information that an adviser must disclose in its advisory contracts with its clients. The amendment removes previous language embedded in the Rule that required advisory contacts or alternative disclosure documents to contain “the information required by Form ADV Part 2.” Form ADV is the uniform form used by investment advisers to register with both the U.S. Securities and Exchange Commission (the “SEC”) and state securities authorities. The form consists of three parts, Part 1, Part 2, and Part 3. Form ADV Part 2 serves as the primary disclosure document for advisers and sets forth requirements for narrative disclosures about the investment advisory firm and the business practices of its principals, fees, conflicts of interest, and disciplinary information.[2]

In its Cost-Benefit Analysis of the proposed rule changes, the Division acknowledged that Form ADV Part 2 provides more detailed information and disclosures than what is typically material in an advisory contract.[3]
The Division further explained its removal of the provision should make it clear that material terms of an advisory contract should be in contained within the contract itself and should include terms consistent with but not necessarily identical to those disclosed in Form ADV Part 2. Accordingly, under amended subsection (P) of Rule 51-4.8(IA), an advisory contract must be in writing and must disclose or address the following components: (1) the services to be provided, (2) the term of the contract, (3) the advisory fee, (4) the formula for computing the fee, 5) the amount of prepaid fees to be returned in the event of contract termination or non-performance, (6) whether the contract grants discretionary power to the adviser, and (7) a non-assignment provision in favor of the client.

Mandatory Disclosures Related To Form ADV Part 2

The Division adopted changes to Rule 51-4.7(IA) to clarify mandatory disclosures and the delivery to clients of an updated Part 2 of an adviser’s Form ADV. Form ADV Part 2 is divided into Part 2A and Part 2B and sets forth the information required in “client brochures” and “brochure supplements.” Under the “Mandatory Disclosure Rule,” an investment adviser and its investment adviser representative are obligated to furnish each advisory client and prospective advisory client with a copy of Part 2 of the investment adviser’s Form ADV. The Division’s amendments add language regarding the annual delivery of Part 2: advisers must deliver within 120 days of their fiscal year-end, an updated Form ADV Part 2 “disclosure statement” or a summary of material changes to the investment adviser’s Form ADV Part 2 that includes an offer to provide a copy of the updated Form ADV Part 2.

Amendments With Respect To Maintaining Books And Records Under Rule 51-4.6(IA)

The Division adopted changes to Rule 51-4.6(IA), the Books and Records Rule, which requires advisers to keep and maintain certain books and records relating to their investment advisory business. Rule 51-4.6(IA) subsection (3) was amended to require investment advisers to provide and keep additional information on their memorandum of trade orders (or trade blotters). Rule 51-4.6(IA) subsection (5) was amended to require firms to maintain copies of “invoices” in addition to bills and other financial statements. In addition, new recordkeeping obligations added to the Books and Records include Rule 51-4.6(IA)(7), which was amended to expand the records requirement of firms to all written communications relating to the business of the investment adviser and Rule 51-4.6(IA)(16), which was added to require advisers to maintain a written summary of all oral complaints in addition to the current requirement to maintain written communications concerning litigation and customer complaints. Advisers will thus be required to take the time to memorialize verbal complaints.

Takeaways for Amended Rules

• Consider the Scope and Applicability of the New and Amended Division Rules: Investment advisers licensed with the State of Colorado should bear in mind the scope and applicability of the Amended Rules, particularly with respect to Form ADV Part 2.

• Review and Update All Advisory Contracts: Colorado Licensed Advisers should consider providing addendums or supplements to advisory contracts that no longer meet the new requirements of Rule 51-4.8(IA)(P). Advisers should also consider reviewing their contracts on a recurring basis to seek to ensure those agreements are compliant with the Division’s regulatory requirements, reflect the adviser’s current business model, and are, most critically, consistent with the practices and fee structures disclosed in other advisory documents, such as Form ADV Part 2A and the adviser’s marketing materials.
• Review Recordkeeping Practices: Colorado Licensed Advisers should also consider whether their recordkeeping practices are consonant with the requirements of the amended Rule. As part of this determination, a Colorado Licensed Adviser should also consider whether (and to what extent) they are sufficiently positioned to promptly provide the firm’s books and records to the Division, preferably in an electronic format, if requested.

Conclusion

The topics highlighted in Parts 1 & 2 of this series (and other regulatory elements that were also part of the recent amendments) deserve attention by all investment advisers whose operations relate in some way to the state of Colorado. These new amendments will investment advisers differently.

Should you have a question about the contents of this article please contact Peter Schwartz, Martine Ventello, or any other member of the Davis Graham Asset Management team.

[1]
Section (P) falls under the larger umbrella of Division Rule 51-4.8(IA), which is a catch-all rule governing investment advisers’ dishonest or ethical conduct.

[2]
General Instructions for Part 2 of Form ADV are available at https://www.sec.gov/about/forms/formadv-part2.pdf

[3]
See the Division’s Cost-Benefit Analysis associated with these Amended Rules here: https://drive.google.com/file/d/1exIuxL_-wT4wYSKdRd6pqaikL5W80sLE/view

This is the second in a three-part series discussing the newly amended rules (collectively the “Rules”) adopted by the Colorado Division of Securities (“Division”) effective as of March 30, 2023 (the “Effective Date”) applicable to certain Colorado investment advisers and their registered representatives (“IARs”). The Rules mostly affect investment advisers registered with Colorado State (such advisers, “Colorado Licensed Advisers”). The Rules also have a lesser impact on investment advisers who are excluded or excepted from Colorado registration.

This Part 2 describes, in detail, the requirements of new Rule 51-4.12(IA) (the “Compliance Rule” or the “Rule”), and offers concrete recommendations to Colorado Licensed Advisers for their compliance programs. Part 1 focused on the new Continuing Education Rule and offered practical guidance to advisers and their IARs for meeting the new requirements. Part 3 will review the amended Rules as a whole and provide best practices and compliance recommendations going forward.

The Compliance Rule

Rule 51-4.12(IA) adds a three-part compliance program requirement for Colorado Licensed Advisers, which includes establishing, maintaining, and enforcing written policies and procedures, designating a Chief Compliance Officer (“CCO”) to oversee the program, and conducting an Annual Review of the program.^[1] The Rule does not require that the CCO conduct the Annual Review, nor does it specify a particular time of year for its completion. Furthermore there is no requirement for the Annual Review to be written.

The scope of the compliance program includes the Colorado Licensed Adviser, its “Supervised Persons,” and its “Access Persons” (with regard to reporting personal trading). All employees, officers, partners, directors, IARs, and other persons who provide advice on behalf of the adviser and are subject to the adviser’s supervision and control are considered “Supervised Persons.”^[2] “Access Persons” are “Supervised Persons” who have access to nonpublic information regarding client transactions or reportable fund holdings, make securities recommendations to clients, or have access to nonpublic recommendations, and generally, all officers, directors, and partners.^[3]

The following areas must be substantively addressed in the firm’s policies and procedures:

Supervisory Policies and Procedures

Colorado Licensed Advisers must adopt, maintain, and enforce supervisory policies and procedures designed to prevent the firm or any of its Supervised Persons from violating the provisions of the Colorado Securities Act and the rules of the Division thereunder (the “Colorado Act”). This supervisory charge is consistent with existing Rule 51-4.6 (IA)(18) (the “Books and Records Rule”), which requires advisers to maintain written supervisory procedures and procedures to supervise the activities of its personnel and to ensure compliance with the securities laws.

Physical Security and Cybersecurity Policies and Procedures

Colorado Licensed Advisers must adopt, maintain, and enforce cybersecurity procedures that safeguard customers’ “Confidential Personal Information” and prevent unauthorized access to client records. Additionally, the new Rule outlines seven considerations that the Division’s Commissioner may use to evaluate whether an adviser’s cybersecurity policies and procedures are “reasonably designed.”^[4] The procedures under the new Rule must include five essential cybersecurity components:

• Annual Risk Assessment: Procedures must provide for a risk assessment which would require the firm or an agent to conduct annual risk assessments of the particular threats and cyber risks to their systems.

• User Security and Access: Procedures must provide for certain access controls designed to minimize employee user-related risks and prevent unauthorized access to electronic communications, databases, and media.

• Identity Authentication: Procedures must provide for authentication practices, particularly concerning authenticating investor or client instructions and verifying an investor’s identity and the authenticity of such request.

• Information Protection: Procedures must provide for the firm’s use and management of electronic communications, in particular, the use of secure email, encryption, digital signatures.

• Disclosure of Risks: Procedures should provide for relevant disclosures to clients regarding the risks of the firm’s use of electronic communications.

The Compliance Rule also adds a new privacy policy requirement which requires Colorado Licensed Advisers to provide their privacy policy to clients at the time of engagement and annually thereafter. The privacy policy must explain how the investment adviser collects and shares non-public personal information, to the extent permitted by state and federal law. If there are any inaccuracies in the privacy policy, the adviser must promptly make updates and provide the revised policy to every client.

Code of Ethics

The Compliance Rule calls for Colorado Licensed Advisers to establish a code of ethics that must cover several of the following matters set out below:

• Standard of Conduct and Compliance with Laws: The code of ethics must set forth a minimum standard of conduct for all personnel and must require their compliance with the Colorado Act, the federal securities laws, and the rules adopted respectively thereunder. The Division has not stated what this minimum standard should be, but the standard must reflect its fiduciary obligations.
• Reporting Violations: Each adviser’s code of ethics must include provisions requiring Supervised Persons to report any code violations promptly to the CCO or other designee.
• Distribution and Acknowledgment: The code must require the adviser to provide each supervised person with a copy of the code, and any amendments, and to obtain written acknowledgment from each supervised person of their receipt of a copy of the code.
• Personal Securities Transactions: The code of ethics must require Access Persons to periodically report their personal securities transactions and holdings to the CCO or other designee. A complete report of each Access Person’s holdings of “Reportable Securities” in which an Access Person has, or acquires, a direct or indirect “beneficial interest” is due no later than ten (10) days after the person becomes an Access Person (the “Initial Report”) and at least once a year after that (the “Annual Report”). These Holdings Reports must be current as of a date not more than forty-five (45) days before the individual becomes an Access Person for Initial Reports or the date the report is submitted for Annual Reports. The code must also require Access Persons to provide quarterly reports of all their personal Reportable Securities transactions (“Quarterly Reports”). Quarterly Reports are due no later than thirty (30) days after the close of the calendar quarter.^[5]
  In addition, the Rule permits three exceptions to the personal securities reporting obligations for (i) transactions effected under an automatic investment plan; (ii) securities held in accounts over which the Access Person had no direct or indirect influence or control; and (iii) transaction reports that would duplicate information contained in trade confirmations or account statements that the adviser has received and maintains as part of its recordkeeping. If the adviser has only one Access Person, it is not required to submit Quarterly or Annual personal trading Reports to itself or to obtain its own approval for certain transactions.

• Pre-approval of Certain Securities Transactions: Lastly, in addition to requiring Access Persons periodically to report personal securities transactions, the code of ethics must also require Access Persons to pre-clear any acquisitions of security in an initial public offering or a limited offering private placement.

Misuse of Material Non-Public Information

The Compliance Rule requires the adoption of policies and procedures reasonably designed to prevent the misuse of material, non-public information. Following the federal standard, the Rule defines “material, non-public information” as material information that has not been disseminated in a manner making it available to investors. Information is material when it is substantially likely that the information would be important to a reasonable investor making an investment decision or is likely to have a significant impact on valuation. The design of the adviser’s policies and procedures will turn on the size and structure of the adviser as well as the nature of the material, non-public information its associated persons are likely to receive.

Business Continuity and Succession Planning

Incorporating aspects of former standalone Rule 51-4.12(IA) Business Continuity and Succession Planning, the Compliance Rule requires the adoption of policies and procedures relating to business continuity and succession planning (or “BCP”). While the specifics of a succession plan will vary depending on each adviser’s business model, the new Rule calls for procedures to include five components:

• Books and Records: Procedures must provide for the protection, backup, and recovery of books and records.

• Communication: Procedures must provide alternative means of communication with customers, key personnel, employees, vendors, and service providers (including third-party custodians).

• Relocation: Procedures must provide for office relocation, if necessary, in the event of temporary or permanent loss of a principal place of business.

• Designation: Procedures must provide for the assignment of duties to qualified, responsible persons in the event of the death or unavailability of key personnel.

• Mitigation: Procedures must provide for controls, practices, and components of the plan that minimize service disruptions and client harm in the event of a sudden significant business interruption.

Takeaways for the Compliance Rule

• Understand the Scope and Applicability of the Compliance Rule: The Compliance Rule applies to an “investment adviser licensed or required to be licensed” with the Division under the Colorado Act. Critically, this means the Rule does not apply to Colorado-based investment advisers that would otherwise be fully regulated by the state but for a licensing exemption (such advisers generally herein “Colorado Exempt Advisers”) or an exclusion from the Colorado “investment adviser” definition (such advisers, “Colorado Excluded Advisers”). For example, Rule 51-4.12(IA) does not apply to advisers relying upon the Colorado private fund adviser licensing exemption under Rule 51-4.11(IA).^[6]
  Likewise, because investment advisers that meet the requirements of the federal exemptions for “family office” advisers, “venture capital fund” advisers, and “foreign private” advisers are exempt from the adviser licensing requirements of the Colorado Act, Rule 51-4.12(IA) does not include these Colorado Exempt Advisers in its coverage either.^[7]
  Similarly, Colorado Excluded Advisers, such as U.S. Banks and Bank Holding Companies, and those who do not otherwise satisfy all three of the elements of the “investment adviser” definition, are not considered within the scope of Rule 51-4.12(IA).^[8]
  Lastly, the new Rule does not affect investment advisers registered with the U.S. Securities and Exchange Commission (such advisers, “SEC Registered Advisers”) who are subject to the existing federal compliance regime established by the Investment Advisers Act of 1940 (the “Advisers Act,” as amended) and Rule 206(4)-7 thereunder.^[9]
• Designate a Chief Compliance Officer: Advisers must “designate” (note: not “hire”) a CCO. The CCO may be an employee with other duties, such as the general counsel or chief legal officer, or a third party specifically engaged to be the adviser’s CCO. Hybrid approaches also include aspects of outsourcing to third parties and internal work. Although not expressly stated, under the Federal equivalent of the Compliance Rule, rule 206(4)-7 under the Advisers Act, the expectation is that the compliance officer should have a position of sufficient seniority and authority within the organization to compel others to adhere to the compliance policies and procedures.

• Identify the firm’s “Supervised Persons” and “Access Persons”: The determination as to whether a person constitutes an “Access Person” requires a facts-and-circumstances analysis that focuses on the Supervised Person’s role and responsibilities and access to nonpublic investment information. Special consideration should be given to the involvement of consultants, affiliates, contractors, service providers, and temporary employees to determine if they function as employees. It is important to note that the status of an Access Person may change over time and may require reassessment.
• Alert and Train Personnel On Their Reporting Obligations: Firms should consider implementing a system for reminders of upcoming compliance deadlines for Quarterly and Annual personal trading transactions and holdings reports. Likewise, firms may want to hold orientation or training sessions with new and existing employees to remind them of their reporting obligations under the code of ethics. This approach could help ensure that reporting is completed on time and importantly, the firm will be far better equipped to avoid violations of its code of ethics if its personnel understand it.
• Determine the When, Who, and What of Conducting the Annual Review: While there is no single approach to conducting an Annual Review, Colorado Licensed Advisers should consider looking to the best practices of SEC Registered Advisers to determine their own “when, who, and what.” Typically, many of these firms perform the review after the end of their fiscal year to align with other year-end review processes. The responsibility for conducting the review usually falls on the CCO, but some firms may hire third-party service providers or outside counsel for assistance. Moreover, although the Compliance Rule and its federal equivalent does not specifically require documentation of the Annual Review, many advisers opt to create a report similar to one required to be provided by the CCO of a registered investment company to its board of directors (or equivalent governing body) setting forth any (i) material changes to the compliance report during the year, and (ii) “material compliance matters” that occurred.^[10]

• Review the Divisions’ Examination Priorities: Licensed Advisers should be mindful of the Division’s 2023 investment adviser examination priorities, which may serve as a valuable tool to assess compliance readiness and to understand the potential enforcement focus of the Division going forward.^[11]

Conclusion

Building off prior guidance issued by the Division in October 2021, the Compliance Rule imposes a number of discrete requirements on Colorado Licensed Advisers.^[12]
It also signals the Division’s continued focus on compliance programs as one of its top priorities in 2023.^[13] As coverage of the new Compliance Rule overlaps in many ways with SEC rules 206(4)-7 and 204A-1, Colorado Licensed Advisers should also consider looking to federal guidance to build and develop an effective compliance program.

Should you have a question about the contents of this article please contact Peter Schwartz, Martine Ventello, or any other member of the Davis Graham Asset Management team.

[1]
See Rule 51-4.12(IA)(C); Rule 51-4.4.1(IA)(B).

[2]
Under Rule 51-4.4.1(IA)(D)(11), ‘‘Supervised person’’ means any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of an investment adviser, or other person who provides investment advice on behalf of the investment adviser and is subject to the supervision and control of the investment adviser. The definition includes investment adviser representatives, employees, independent contractors, or other associated persons and supervised personnel, or other person acting on the behalf of the investment adviser.

[3]
The Rule includes a presumption of Access Person status for all directors, officers, and partners of an investment adviser whose primary business is providing investment advice. See Rule 51-4.4.1(IA)(D)(1).

[4]
In determining whether the cybersecurity procedures are reasonably designed, the Commissioner may consider: “(i.) The firm’s size; (ii.) The firm’s relationships with third parties; (iii.) The firm’s policies, procedures, and training of employees with regard to cybersecurity practices; (iv.) Authentication practices; (v.) The firm’s use of electronic communications; (vi.) The automatic locking of devices that have access to Confidential Personal Information; and (vii.) The firm’s process for reporting of lost or stolen devices.” Rule 51-4.4.1(IA)(A)(3)(a).

[5]
The Division’s Compliance Rule effectively treats all securities as a “Reportable Security” with five exceptions that mirror those exceptions with the definition in Section 202(a)(18) of the Securities Act of 1933: (1) Direct obligations of the Government of the United States; (2) Bankers’ acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; (3) Shares issued by money market funds; (4) Shares issued by open-end funds other than reportable funds; and (5) Shares issued by unit investment trusts that are invested exclusively in one or more open-end funds, none of which are reportable funds.

[6] For a deeper discussion of the contours of the private fund adviser licensing exemption, see Davis Graham Legal Alert: Division of Securities Adopts New Exemption from Investment Adviser Licensing Requirements. A private fund adviser who provides investment advice solely to one or more “qualifying private funds” is exempt from the Colorado licensing requirements, subject to certain additional conditions. A “qualifying private fund” means a private fund that meets the definition of a “qualifying private fund” in Rule 203(m)-1 under the federal Investment Advisers Act of 1940 (the “Advisers Act”) which, in effect defines “qualifying private fund” as a “3(c)(1) and 3(c)(7) funds”, as they are more fully defined under the federal Investment Company Act of 1940 (the “1940 Act”). Advisers relying upon the Colorado private fund adviser licensing exemption in Rule 51-4.11(IA) should bear in mind that they could potentially operate as an “Exempt Reporting Adviser” by taking advantage of the federal private fund adviser exemption under Section 203(m)(1) of the Advisers Act and rule 203(m)-1 thereunder (“Private Fund Adviser Exemption”) or the Section 203(l) and rule 203(l)-1 thereunder (“Venture Capital Fund Exemption”). The Private Fund Adviser Exemption is available to advisers who solely manage “qualifying private funds” and have less than $150 million in assets under management. A detailed analysis of the Venture Capital Fund Exemption conditions is beyond the scope of this Alert, but very broadly, investment advisers that solely advise venture capital funds may be exempt from registration under the Advisers Act.

[7]See Colorado Securities Commissioner Interpretive Order No. 12-IN-001, March 30, 2012, providing that investment advisers meet the federal exemption requirements for family office advisers, venture capital fund advisers, and foreign private advisers are otherwise exempt from the adviser licensing requirements of the Colorado Securities Act. Against, at the federal level, venture capital fund advisers that rely on the Section 203(l) “Venture Capital Fund Exemption” are also considered SEC “Exempt Reporting Advisers. ”

[8] The term “bank” is defined in Section 202(a)(2) of the Advisers Act. Persons who: (1) engage in the business of advising others (2) regarding securities (3) for compensation are regulated as investment advisers by the Advisers Act and under C.R.S. § 11-51-401(1.5) at the Colorado level. However, a person must satisfy all three of the elements of the “investment adviser” definition for such regulations to apply. Section 202(a)(11) of the Advisers Act defines the term “investment adviser” 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 part of a regular business, issues or promulgates analyses or reports concerning securities.” Under C.R.S. § 11-51-201(9.5)(a)(I) “investment adviser” is defined as verbatim to Section 202(a)(11) of the Advisers Act and includes (II) “financial planners or other persons who, as an integral component of other financially related services, provide investment advisory services to others for compensation and as a part of a business or who hold themselves out as providing investment advisory services to others for compensation.”

[9] Colorado uses the term “Federal Covered Adviser.” See
C.R.S. § 11-51-201(5.5)(a). Generally speaking, Section 203A of the Advisers Act prohibits “Mid-Size Advisers” with between $25 million and $100 million of assets under management from registration with the SEC. In some cases, however, advisers under the $100 million threshold may be required to register with the SEC instead of the states where an adviser is: (1) exempt from state registration in its home state or (2) not subject to subject to examination by the securities authority of the state. See
Advisers Act Section 203A(a)(2)(B)(i). Advisers who take advantage of an exception from Colorado registration should pay close attention to the interaction of state and federal investment adviser regulation.

[10]
See generally, SEC Rule 38a-1(a)(4)(iii).

[11]
The Division’s Examination Priorities can be found at: https://securities.colorado.gov/press-release/alert-the-colorado-division-of-securities-announces-2023-investment-adviser.

[12]
See Colorado Division of Securities Investment Adviser Guide (Volume I), October 28, 2021.

[13]
See Colorado Division of Securities 2023 Investment Adviser Examination Priorities, January 31, 2023, at p.,3, (“The Staff expects that one of the Division’s top examination priorities in 2023 will be assisting advisers in complying with new rules”).

On July 3, 2023, the U.S. Fish and Wildlife Service (FWS) proposed to list the dunes sagebrush lizard as endangered. The dunes sagebrush lizard exists solely in shinnery oak duneland complexes in the Permian Basin, both in Texas and New Mexico.

FWS has considered dunes sagebrush lizard to be a species of concern for decades. FWS first identified the dunes sagebrush lizard, then known as the “sand dune lizard,” as a candidate for listing in 1982. The species remained a candidate species when FWS proposed to list it in 2010. In 2012, however, FWS withdrew its proposed listing rule after concluding that conservation efforts addressed and alleviated threats to the species adequately for it to continue to be viable into the future.

FWS based its new proposal to list the dunes sagebrush lizard as endangered principally on past and projected future impacts to the species from oil and gas development and frac sands mining. Specifically, FWS based its listing proposal on several determinations, including that: 1) nearly half of shinnery oak duneland habitat has been degraded so that it is no longer capable of supporting populations of the species; 2) habitat fragmentation caused by oil and natural gas development and frac sands mining is likely to continue to occur in the future; and 3) even if no new development occurs in the species’ habitat, existing oil and gas development will continue to negatively impact the species and make it vulnerable to other threats. FWS’s proposed listing rule relied on a species status assessment it recently finalized.

Notably, FWS has not proposed to designate critical habitat with the proposed listing rule.

The Effect of Listing on Land Users – Incidental Take Prohibition & Section 7 Consultation

Listing wildlife as endangered has two effects on land users. First, the ESA prohibits take of endangered wildlife. Second, a federal agency must consult with FWS before issuing a permit or land use authorization that may affect an endangered species.

The ESA prohibits take of endangered wildlife, which is defined to include harming, harassing, and killing endangered wildlife, among other actions. The ESA’s prohibition on take includes both intentional take and take that occurs unintentionally as the result of otherwise lawful activities, such as energy development (“incidental take”).

The proposed rule identifies the following actions as potentially resulting in prohibited take of dunes sagebrush lizard:

• Destruction, alteration, or removal of shinnery oak duneland and shrubland vegetation;
• Degradation, removal, or fragmentation of shinnery oak duneland and shrubland formations and ecosystems;
• Disruption of water tables in dunes sagebrush lizard habitat;
• Introduction of nonnative species that compete with or prey upon the dunes sagebrush lizard;
• Unauthorized release of biological control agents that attack any life stage of the dunes sagebrush lizard or that degrade or alter its habitat; and
• Herbicide or pesticide applications in shinnery oak duneland and shrubland vegetation and ecosystems.

To engage in land use activities that will result in incidental take of endangered wildlife on private lands, land users must obtain a permit from FWS. To obtain a permit, the land user must have entered into a candidate conservation with assurances (CCAA) with FWS prior to listing or must develop an approved habitat conservation plan.

In New Mexico, the Center for Excellence (“CEHMM”) administers a CCAA for oil and gas operators on private lands. Prior to the effective date of any listing decision, an operator may execute a written agreement with CEHMM committing to adhere to certain conservation measures to protect the dunes sagebrush lizard. If and when the dunes sagebrush lizard is listed, an enhancement of survival permit accompanying the CCAA will authorize any incidental take that occurs as the result of activities conducted in accordance with the agreement.

In Texas, two conservation plans have been developed. One conservation plan is a CCAA that covers oil and gas activities, agriculture, and ranching activities. The other conservation plan is a CCAA that covers oil and gas activities, sand mining, linear infrastructure, wind, solar, local governments, agriculture, and ranching. As the preamble to the proposed rule details, however, few land users are participating in these conservation plans.

In addition to prohibiting take of endangered species, the ESA requires federal agencies to consult with FWS to ensure their actions do not jeopardize the continued existence of endangered species, in a process known as “section 7 consultation.” Section 7 consultation can lead to delay and additional conservation measures. With respect to the dunes sagebrush lizard, the Bureau of Land Management (BLM) must consult with FWS before issuing leases, permits, and rights-of-way for energy and other land uses in southeast New Mexico. In New Mexico, CEHMM administers a Candidate Conservation Agreement on federal lands. Prior to the effective of a listing, an operator may execute a written agreement committing to adhere to certain conservation measures to protect the dunes sagebrush lizard; in exchange, the operator will enjoy a streamlined process for section 7 consultation and a high degree of certainty that FWS will not require additional conservation measures.

Public Participation & Next Steps

FWS is accepting public comment on the proposed listing rule until September 1, 2023. On July 31, 2023, FWS will hold a public informational session from 5 to 6 p.m. and a public hearing from 6 to 8 p.m., mountain standard time.

The ESA directs that FWS must issue a final listing rule or to withdraw the proposed rule within one year of publication of the proposed rule (i.e., by July 3, 2024). The ESA allows FWS to extend this deadline by six months if there is substantial disagreement regarding the sufficiency or accuracy of available data relevant to the proposed listing rule.

Please contact Katie Schroder with questions about the proposed listing rule or its effect.

On June 16, 2023, the Bureau of Land Management (BLM) published a proposed rule that would revise the agency’s existing regulations for wind and solar rights-of-way and leases on public lands contained at 43 C.F.R. part 2800. Most significant, the proposed rule would adjust rental rates and capacity fees for wind and solar rights-of-way, modify BLM’s competitive process for offering lands for lease, and revise the BLM’s criteria for prioritizing right-of-way applications. Through this proposed rule, the BLM aims to promote the development of renewable energy on public lands and deliver greater certainty for the private sector.

Annual Rents and Payments (§ 2806)

The Federal Land Policy and Management Act (FLPMA) requires that the BLM rent public lands at fair market value. The BLM’s existing regulations attempted to capture fair market value for wind and solar rights-of-way by imposing a multicomponent fee that was comprised of an acreage rent, capacity fee, and any competitive bids. The Energy Act of 2020 amended FLPMA to allow the BLM to reduce rental rates and capacity fees for wind and solar projects. See 43 U.S.C. § 3003. In the proposed rule, the BLM seeks to exercise this authority by revising the rental and fee structure for both new and existing wind and solar rights-of-way. Most notably, the proposed rule would:

• Require the payment of either an acreage fee or a capacity fee, whichever is higher in a given year;
• Implement a capacity fee based on wholesale power prices and the actual energy produced by a facility rather than an estimate of the energy that could be generated at a facility;
• Implement an acreage fee based on per-acre values for pastureland from the National Agricultural Statistics Service Cash Rents Survey. The acreage fee would be established at the beginning of the grant or lease term and then adjusted annually at a proposed 3% percent; and
• Include a “Buy American” escalating capacity fee reduction, whereby a greater value of American-made products used in facility construction would result in a greater reduction of capacity fees.

Competitive Process for Solar and Wind Energy Development Applications or Lease (Subpart 2809)

The existing regulations require the BLM to use a competitive process to lease lands within designated right-of-way leasing areas. The proposed rule would give the BLM discretion to use a competitive process both within and outside of designated leasing areas. Under the proposed rule, the BLM may use a competitive process on its own initiative, when nominated or requested by the public, or when there are two or more competing applications.

Additionally, the proposed rule would adjust the BLM’s process by which interested parties can nominate lands for competitive lease (§ 2809.11). The proposed rule would also assign different statuses to successful bidders for lands within and outside designated leasing areas; these statuses reflect the BLM’s need for further evaluation of lands outside of designated leasing areas (§ 2809.15).

Prioritization Factors for Solar and Wind Energy Development Rights-of-Way (§ 2804.35)

The proposed rule would revise the BLM’s direction as to how it will prioritize applications for wind and solar rights-of-way. The BLM explained that the existing rule relied on screening criteria that were overly prescriptive. Instead, the BLM has proposed factors it will “holistically” consider to prioritize applications, which include:

• Whether a project is in an area preferred for wind and solar development;
• Whether a project avoids adverse impacts or conflicts;
• Whether a project conforms with land use plans;
• Whether a project is consistent with laws;
• Whether the project incorporates best management practices; and
• Any other factors identified in BLM guidance.

Duration of Grants and Leases (§ 2805.11)

The proposed rule would extend the maximum term of a lease or grant for solar or wind development projects from 30 years to 50 years.

Public Participation

Public comments on the proposed rule must be received by August 15, 2023, and may be submitted at www.regulations.gov
(RIN 1004-AE78). The BLM will host three virtual public meetings
regarding the proposed rule on June 29, July 11, and July 25, 2023. The BLM anticipates finalizing the rule by the summer of 2024.

For more information about the proposed rule, please see the BLM’s FAQs. If you have questions about the proposed rule or how to participate in the public comment process, please contact Katie Schroder or Natalie Boldt.

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 Davis Graham 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/

On May 24, 2023, Governor Jared Polis signed the Amenities for All Genders in Public Buildings Act (the “Act”) into law. The Act applies to all publicly accessible buildings by January 1, 2024, and all buildings accessible by employees or enrolled students by July 1, 2025. The Act defines publicly accessible as any indoor or outdoor space or area open to the public and does not include private offices or workspaces not generally open to customers or public visitors.

The Act’s requirements apply to any new construction or restroom renovation in a qualifying public building owned, operated, or controlled by the state, county, or municipality.

First, any building covered by the Act must:

1. Provide a non-gendered single-stall restroom or a non-gendered multi-stall restroom where the restroom is accessible to the public;
2. Ensure that any single-stall restroom is non-gendered;
3. Allow for the use of a multi-stall restroom by a person of any gender if the restroom meets requirements laid out in the International Plumbing Code (“IPC”), adopted into the Colorado Plumbing Code and Colorado Fuel and Gas Code; and
4. Construct the restroom in compliance with the Americans with Disabilities Act (“ADA”).

Additionally, any building covered by the Act must provide any caregiver, regardless of gender, caring for an infant access to a safe, sanitary, and convenient baby diaper changing station where a restroom is accessible to the public as follows:

1. If the building has only gender-specific restrooms, there must be a changing table in each restroom;
2. If there is a non-gendered single-stall restroom is available, there must be at least one changing station in that restroom. Public entities are encouraged to provide changing tables in the gender-specific restrooms in this instance, but not required;
3. If there is a non-gendered multi-stall restroom available, there must be at least one changing table in that restroom. Public entities are encouraged to provide changing tables in the gender-specific restrooms, but not required; and
4. In the alternative, public entities must provide an easily accessible location with equivalent privacy and amenities as a restroom.

In all cases, the changing stations must be maintained, repaired, and replaced as necessary to ensure safety. The changing stations must be cleaned at the same frequency as the restroom in which it is located or the restrooms on the same floor in the same space in which the changing table is located.

Beginning on July 1, 2024, and no later than July 1, 2026, a non-gendered restroom must be labeled with a non-gendered pictogram. Any restroom with a changing station must have signage with a pictogram void of gender indicating the presence of the changing station. There must be signage at or near the entrance of any building covered by the Act indicating the location of non-gendered restrooms and changing stations. If the building has a central directory indicating the location of offices, restrooms, and other building facilities, the directory must include non-gendered pictograms indicating the locations of non-gendered restrooms and changing stations.

Projects may be exempt for the following reasons:

1. Compliance with the Act would cause failure to comply with building standards governing accessibility; or
2. If the project received approval before the Act’s effective date; or
3. The building is designated as a certified historic structure. The Act defines a certified historic structure as a property certified by the state historical society or an entity other than the property owner authorized pursuant to state law to register historic properties.

Failure to comply with the Act is a discriminatory or unfair practice, and employees may file a complaint with the Colorado Civil Rights Division (“CCRD”).

There are several key takeaways from the Act:

• Plans for construction in buildings covered by the Act may need to be modified to comply with the new restroom, changing station, and signage requirements;
• Some construction may be exempted from the Act’s requirements; and
• Buildings covered by the Act may need to update their cleaning schedules to comply with new changing station cleaning requirements.

The Amenities for All Genders in Public Buildings Act is codified as C.R.S. §9-5.7-101 et. seq. The Act goes into effect ninety days after the final adjournment of the General Assembly.

On June 6, 2023, Governor Jared Polis signed SB12-172 into law. The Protecting Opportunities and Workers’ Rights Act (the “POWR Act” or “Act”) redefines “harassment” in Colorado’s anti-discrimination laws. It makes changes to anti-discrimination laws regarding protected class, people with disabilities, record preservation, and affirmative defenses. Finally, it amends what is considered a valid non-disclosure agreement (“NDA”).

Harassment:

The Act defines harassment as unwelcome conduct or communication directed at an individual or group of individuals’ membership in a protected class. Unless otherwise meeting the standards of the Act and the totality of circumstances, petty slights, minor annoyances, or lack of good manners do not constitute harassment.

Harassment does not need to be severe and pervasive, as was the previous standard. Communication or conduct is harassment where it is:

1. Subjectively offensive to the individual alleging harassment and objectively offensive to a reasonable individual of the same protected class; or
2. Submission to the conduct is a condition of the individual’s employment; or
3. An employer makes employment decisions based on the individual’s submission or objection to the harassing conduct.

The Act also requires the Colorado Civil Rights Division (CCRD) to include harassment as a type of discrimination or unfair practice on its complaint intake forms.

Lastly, the Act establishes an affirmative defense for employers when:

1. The employer has created and maintained a program reasonably designed to prevent harassment;
2. The employer has communicated the existence of that program to supervisory and nonsupervisory employees; and
3. The employee has unreasonably failed to take advantage of the harassment prevention program.

Other changes to anti-discrimination law:

The Act makes a number of additional changes to anti-discrimination laws.

The Act adds protection for individuals based on their marital status. This change is in addition to established protections for individuals based on race, creed, color, sex, sexual orientation, gender identity, gender expression, religion, age, national origin, or ancestry.

An employer may not make hiring or discharge decisions or promotion or demotion decisions based on an individual’s disability unless there is no reasonable accommodation the employer can provide that would allow the individual to satisfy the essential functions of the job, and the disability actually disqualifies the individual.

Employers must retain records of complaints of discriminatory or unfair employment practices filed for at least five years after either 1) the date the employer received the record or 2) the date of the final disposition of any personnel action related to the complaint, whichever comes later. Sufficient records contain:

• The date of the complaint;
• The identity of the complaining party (unless anonymous);
• The identity of the alleged perpetrator; and
• The substance of the complaint.

These records are not
considered public records and, thus, not subject to public inspection.

Non-disclosure agreements:

The Act prohibits non-disclosure or confidentiality agreements (“NDAs”) between an employer and employee that would prevent the employee from discussing alleged discrimination or unfair employment practices unless the following requirements are met:

1. The NDA applies equally to all parties;
2. The NDA expressly states that it does not limit the employee or prospective employee from disclosing the facts of the alleged discrimination;
3. If there is a non-disparagement provision, there is a condition preventing the employer from enforcing the NDA if the employer disparages the employee or prospective employee; and
4. Any damages are not a penalty or punishment and are reasonable and proportionate.

An employer is liable for actual damages and subject to a fine of up to five thousand dollars per violation where the employer violates any of the new NDA requirements. The Act also allows the CCRD, or an employee presented with an NDA violating the Act, to bring immediate action. A court may reduce relief available if the employer can demonstrate that the act leading to the action was in good faith and based on a reasonable belief that the employer’s actions complied with the Act.

There are several key takeaways from the Act:

• Employers may need to train their employees in both supervisory and nonsupervisory roles on how to avoid harassment in the workplace.
• Employers may need to update their existing anti-harassment education or create a new program to comply with the Act.
• Employers may not make hiring decisions based on an individual’s disability unless the disability prevents the individual from satisfying the essential functions of the job and actually disqualifies them from the provision. This language is a change from the previous standard.
• Employers may need to train employees to refrain from making hiring or promotion, and demotion decisions based on marital status.
• Employers must preserve records of complaints of harassment for five years.
• Employers must ensure that an NDA with an individual who has filed a complaint alleging a discriminatory or unfair employment practice captures the requirements above.

The Protecting Opportunities and Workers’ Rights Act applies to employment practices occurring on or after the effective date of the law, which is 90 days after the adjournment of the Colorado General Assembly. The Act goes into effect on August 7, 2023.

On May 25, 2023, Lieutenant Governor Dianne Primavera, acting on behalf of Governor Jared Polis, signed HB23-1032 into law. The Remedies for Persons with Disabilities Act (the “Act”) prohibits businesses from discriminating on the basis of disability in places of public accommodation. Places of public accommodation include businesses that offer sales or services to the public, excluding places principally used for religious purposes such as synagogues, mosques, or churches. The most common types of disability-related public accommodation lawsuits can occur, for example, a) when someone with a physical impairment encounters difficulty accessing a building or certain areas within a building, b) when a business cannot communicate effectively with someone with a vision, hearing, or speech disability, or c) when website content is difficult to access for someone with a visual, hearing, or physical impairment.

The Act permits individuals who allege discrimination in a place of public accommodation to file a complaint directly with a court. Unlike individuals who allege disability discrimination in other contexts, such as housing, employment, and discriminatory advertising, individuals alleging disability discrimination in public accommodations may bypass the requirement to exhaust administrative remedies through the Colorado Civil Rights Division (“CCRD”).

The Act also enhances the types of enforcement mechanisms available to courts when there has been a finding of discrimination in places of public accommodation. Individuals who have been discriminated against are entitled to a court order requiring compliance with public accommodations law and either 1) recovery of monetary damages from the business or 2) a statutory fine of $3,500 for each individual claimant levied against the business. Prior to the Act, courts in Colorado could choose just one of either a court order, monetary damages, or a statutory fine.

There are several key takeaways from the Remedies for Persons with Disabilities Act:

• Because “public accommodation” covers all businesses that offer goods and services to the public, a broad swath of businesses in Colorado are required to comply with public accommodation for persons with disabilities.
• Businesses should be aware that the Act requires courts to mandate compliance with public accommodation for persons with disabilities if a court finds that there has been discrimination.
• Likewise, businesses should be aware that the Act requires courts to mandate either monetary damages or fines if the court finds that there has been discrimination.

According to the CCRD, individuals alleging discrimination have 60 days from the alleged discrimination to file a complaint with the court. The Remedies for Persons with Disabilities Act is codified as Colorado Revised Statutes § 24-34-306 and § 24-34-802. The Act went into effect when it was signed on May 25, 2023.