Adopted Rules Title 7

TITLE 7. BANKING AND SECURITIES

CHAPTER 2. RESIDENTIAL MORTGAGE LOAN ORIGINATORS REGULATED BY THE OFFICE OF CONSUMER CREDIT COMMISSIONER

SUBCHAPTER A. APPLICATION PROCEDURES

The Finance Commission of Texas (commission) adopts the amendments to §2.102 (relating to Registration with Nationwide Mortgage Licensing System and Registry) in 7 TAC Chapter 2, concerning Residential Mortgage Loan Originators Regulated by the Office of Consumer Credit Commissioner.

The commission adopts the amendments to §2.102 without changes to the proposed text as published in the December 27, 2024, issue of the Texas Register (49 TexReg 10451). The rule will not be republished.

The commission did not receive any official comments on the proposed amendments.

The rule at §2.102 relates to procedures for an individual to register with the NMLS system as a residential mortgage loan originator (RMLO). In general, the purpose of the adopted rule changes to 7 TAC §2.102 is to remove language providing that certain entities are not required to register with NMLS, in order to support efforts to migrate license groups to NMLS.

The Office of Consumer Credit Commissioner (OCCC) distributed an early precomment draft of proposed changes to interested stakeholders for review, and then held a stakeholder webinar regarding the rule changes. During the webinar, the OCCC answered questions from stakeholders about the rule changes. The OCCC appreciates the input provided by stakeholders. The OCCC did not receive any written precomments on the rule text draft.

The Nationwide Multistate Licensing System (NMLS) is an online platform used by state financial regulatory agencies to manage licenses, including license applications and renewals. State agencies created NMLS in 2008. The federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 explains that the purposes of NMLS include increasing uniformity and reducing regulatory burden. Federal SAFE Act, 12 USC §5101. Each state currently uses NMLS for licensing individual RMLOs, and 59 state agencies use the system for licensing mortgage companies. See NMLS, Q1 2024 Mortgage Industry Report (June 2024). NMLS is managed by the Conference of State Bank Supervisors and is subject to ongoing modernization efforts and enhancements.

Under Texas Finance Code, §14.109, the OCCC is authorized to require use of NMLS for certain license and registration types. During calendar year 2025, the OCCC intends to begin a phased process of migrating license groups from ALECS (the OCCC's current licensing platform) to NMLS. The OCCC believes that moving to NMLS will improve the user experience of the licensing system and promote efficiency. This is particularly true for entities that hold licenses with the OCCC and with another state agency, because these entities will be able to manage multiple licenses through NMLS.

Currently, the rule at §2.102 describes procedures for an individual to register with NMLS as an RMLO. Current §2.102(b) states: "Entities licensed or applying for a license with the OCCC to make, transact, or negotiate residential mortgage loans are not required to register with NMLS."

Adopted amendments to §2.102 remove current subsection (b). This change will support the OCCC's efforts to migrate license groups to NMLS. This change is consistent with the OCCC's authority under Texas Finance Code, §14.109, to require use of the NMLS system for certain license and registration types. Other adopted amendments throughout §2.102 renumber other subsections accordingly.

The rule amendments are adopted under Texas Finance Code, §11.304, which authorizes the commission to adopt rules necessary to supervise the OCCC and ensure compliance with Texas Finance Code, Chapter 14 and Title 4. In addition, Texas Finance Code, §180.004, authorizes the commission to implement rules necessary to comply with Texas Finance Code, Chapter 180, and to carry out the intentions of the federal Secure and Fair Enforcement for Mortgage Licensing Act. Also, Texas Finance Code, §180.061, authorizes the commission to adopt rules establishing requirements for licensing through NMLS.

The statutory provisions affected by the adoption are contained in Texas Finance Code, Chapters 14 and 180.

The agency certifies that legal counsel has reviewed the adoption and found it to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on February 21, 2025.

TRD-202500656

Matthew Nance

General Counsel, Office of Consumer Credit Commissioner

Finance Commission of Texas

Effective date: March 13, 2025

Proposal publication date: December 27, 2024

For further information, please call: (512) 936-7659

PART 7. STATE SECURITIES BOARD

CHAPTER 115. SECURITIES DEALERS AND AGENTS

7 TAC §§115.1 - 115.6, 115.8 - 115.11, 115.16, 115.21, 115.22, 115.24

The Texas State Securities Board adopts amendments to §115.1, concerning General Provisions; §115.2, concerning Application Requirements; §115.3, concerning Examination; §115.4, concerning Evidences of Registration; §115.5, concerning Minimum Records; §115.6, concerning Registration of Persons with Criminal Backgrounds; §115.8, concerning Fee Requirements; §115.9, concerning Post-Registration Reporting Requirements; §115.10, concerning Supervisory Requirements; §115.11, concerning Finder Registration and Activities; §115.16, concerning Use of Senior-Specific Certifications and Professional Designations, §115.22, concerning Electronic Submission of Forms and Fees; and adopts new §115.24, concerning Adoption by Reference of Conduct Rules. The Board also adopts amendments to §115.21, concerning System Addressing Suspected Financial Exploitation of Vulnerable Customers Pursuant to the Texas Securities Act, Section 45, which includes renaming the caption of the section to read "System Addressing Suspected Financial Exploitation of Vulnerable Customers Pursuant to the Texas Securities Act, Chapter 4004, Subchapter H."

The proposals were published in the November 8, 2024, issue of the Texas Register (49 TexReg 8814), and corrected in the December 20, 2024, issue of the Texas Register (49 TexReg 10440). The amendment to §115.1 was adopted with changes to the published proposal and will be republished. The change consisted of amending §115.1(a)(2)(A)(vi) and (vii) to move the "and" connector from the end of (A)(vi) to the end of (A)(vii), which is necessary due to the addition of new (A)(viii). The new rule §115.24 and the amendments to §§115.2 - 115.6, 115.8 - 115.11, 115.16, 115.21, and 115.22 were adopted without changes and will not be republished.

The rules in 7 TAC Chapter 115 govern securities dealers and agents. The purpose of the adoption of a new rule and amendments to thirteen rules in this chapter is to implement changes pursuant to the agency's periodic review of its rules. These changes improve the readability, consistency, and clarity of the rules in this chapter, and ensure the rules are current, accurate, and conform to the codified version of the Texas Securities Act (Act), which promotes transparency and efficient regulation.

The references to sections of the Act in §§115.1, 115.3 - 115.5, 115.8, 115.16, and 115.21 are updated to refer to the correct sections in the codified version of the Act in the Texas Government Code. The codification was adopted by HB 4171, 86th Legislature, 2019 Regular Session, and became effective January 1, 2022 (HB 4171).

Sections 115.3 and 115.5 are amended to replace the references in those sections to the term "Securities and Exchange Commission" with the term "SEC." SEC is a defined term in §107.2, concerning Definitions.

Section 115.5 is amended to abbreviate a cite to the Code of Federal Regulations found in subsection (a). CFR is a defined term in §107.2, concerning Definitions.

Section 115.1 is amended to add "or ‘in this state'" to subsection (a)(8) to conform the definition of "within this state" to language used in the codified Act and to delete redundant language in subsection (b)(2)(D) that is also contained in subsection (d). In addition, subsection (c)(2) is amended to correct a cross reference.

Section 115.3 is amended to replace the reference to "North American Securities Administrators Association" with the term "NASAA" in subsection (a)(1). NASAA is a defined term in §107.2, concerning Definitions. In addition, subsection (b)(4) is amended to update the names of two NASAA examinations.

Amendments to §§115.3(c)(3)(D), 115.5(b)(13), and 115.6(g) are made to remove or update outdated language.

Section 115.5 is amended to abbreviate a reference to "Central Registration Depository" as "CRD" for consistency.

An additional amendment to §115.1 relates to the definition of a dealer's branch office. The definition of a dealer's "branch office" set forth in §115.1(a)(2) is amended to incorporate and recognize a rule adopted by the Financial Industry Regulatory Authority (FINRA) that establishes a new designated location category referred to as a "residential supervisory location" (or RSL). Dealer firms that are members of FINRA may designate certain locations where they do business as an RSL instead of a "branch office," if the firm and location meet specified criteria and conditions set forth in FINRA rules. Texas locations that are designated by dealers registered in Texas as RSLs under FINRA rules are excluded from the definition of a dealer's "branch office." This change reduces compliance costs and administrative burdens for dealers because it results in registered dealers no longer needing to make a branch office notice filing with the agency for locations that are RSLs, which locations are treated under the rules as non-branch locations.

Section 115.2 is reorganized, and a cross reference to §115.22 is added to §115.2 to improve consistency and readability of provisions governing application requirements. In addition, subsection (d) is amended to allow the agency registration staff the option to notify applicants by email (which is a faster and more reliable delivery method) rather than by certified mail of automatic withdrawal of applications that have been pending for more than 90 days. This change facilitates the internal processing of registration applications by reducing the use of staff resources. References to "certificate of formation" which is the name of the form used by the Texas Secretary of State for formation documents filed with it, are added to the respective lists of formation of organization documents (including articles of incorporation, partnership agreements, articles of association, and charters) found in §115.2(a)(2)(A), as well as in §115.5(e)(5), for clarity and to improve accuracy.

Section 115.3 is amended to add new subsection (c)(5)(A) and (c)(5)(B) to recognize and grant waivers of examination or reexamination requirements for certain classes of applicants who are participating in FINRA's Maintaining Qualifications Program (MQP) or NASAA's Exam Validity Extension Program (EVEP) and meet other requirements. Section 115.3 is also amended to add subsection (c)(5)(C) to recognize and grant waivers of examination requirements for applicants who have received an examination waiver from FINRA.

The amendments to §115.3(c) provide greater coordination with other securities regulators and reduce the application processing time for eligible applicants and compliance costs for their firms. Waivers will be processed with more consistency, uniformity, and transparency.

In addition to the amendments to §115.3(c), §115.3(d) is amended to update the rule to more accurately reflect the Texas securities law examination process, and to specifically direct applicants with questions about the process to the Registration Division for information, which increases transparency. This subsection is also amended to impose a one-week waiting period to retake the examination for applicants who failed the exam to provide and encourage more time to study prior to retaking the exam.

Section 115.8, which relates to fee requirements, is amended to remove an incorrect reference in subsection (a) to fees for officers and partners of a securities dealer, to update the reference to the agency's website, and to clarify that persons seeking information on fee requirements may contact the Registration Division of the agency.

Section 115.9, which sets out events that a registered dealer or agent must report to the Securities Commissioner after registration, is amended in subsection (a)(3) to clarify that misdemeanor offense actions that are listed in §115.6(c) of this chapter must be reported. In addition, §115.9(a)(6) is amended to clarify that registered entities must notify the Commissioner of changes in legal status of their entities. These amendments apprise dealers and agents of their obligations under the Act which promotes transparency.

Section 115.10, which relates to supervisory requirements of dealers, is amended to incorporate and recognize FINRA's Remote Inspections Pilot Program (RIPP). Former subsection (c) which governed internal inspections of dealers, is now divided into two paragraphs, with new subsection (c)(1) including the language in former subsection (c) with slight amendments and additions, and new subsection (c)(2) being new language that addresses the RIPP and its participants. This change clarifies that dealers registered in Texas that are participating in the RIPP will be in compliance with §115.10(c) if they conduct their internal inspections programs in compliance with FINRA rules. Through this amendment, greater coordination among securities regulators is achieved, and administrative burdens for firms are reduced which reduces compliance costs. Dealers are also notified of required content for their supervisory systems which improves their ability to carry out their supervisory duties.

Section 115.11(a) is amended to remind and inform finder applicants that finders by the definition set forth in §115.1(a)(9) are not permitted to register in other capacities. In addition, §115.11(f) is amended to correct a cross reference and to remove an outdated reference to filings being in paper form.

Section 115.21 is renamed to refer to the applicable section of the codified Act.

Section 115.22 is revised to add a reference to finder registration in subsection (b) for clarification that finder applicants may submit documents electronically, and to remove an unneeded reference to dealers and agents in §115.22(c).

New rule §115.24 adopts by reference an SEC rule governing dealer conduct referred to as the SEC Regulation Best Interest (or Regulation BI). The new rule also adopts by reference other fair practice, ethical standard, or conduct rules promulgated by FINRA, the SEC, the United States Commodity Futures Trading Commission (CFTC), or any self-regulatory organization approved by the SEC or the CFTC. Regulation BI established and standardized a "best interest" standard of conduct for FINRA dealers and their agents when recommending securities transactions or investment strategies to retail investors. Activities and practices that do not comply with the requirements of Regulation BI or the other conduct rules enumerated in the adopted rule, may constitute bases for denials, suspensions, or revocations of the registrations of dealers or agents. A related change amends §115.5, concerning Minimum Records, requiring additional related recordkeeping requirements to verify compliance with new rule §115.24. Since Regulation BI went into effect, agency staff have used this standard for guidance as to what conduct constitutes an inequitable practice under the Act involving retail investors of dealers or agents registered in Texas. The new rule apprises dealers and agents of their obligations under the Act and of the types of activities or practices which may result in sanctions under the Act. The rule allows the Securities Commissioner the flexibility to assess administrative fines against violators of these requirements, which furthers the Board's mission to protect Texas investors. Greater coordination with other securities regulators is also achieved.

The Board received five public comment letters regarding the rulemaking in Chapter 115. One letter was from the corporate office of LPL Financial, a registered broker-dealer firm. A second letter was from 365 of LPL's financial professionals in Texas. The other three support letters were from securities industry trade groups: Financial Planning Association (FPA), Insured Retirement Institute (IRI), and the Securities Industry and Financial Markets Association (SIFMA). The commenters all expressed general support for the proposals. The Board appreciates the support expressed by these commenters.

LPL Financial and SIFMA submitted comment letters strongly supporting the proposal to amend §115.1 to incorporate and recognize FINRA's RSL rule, along with the other proposed rulemaking. SIFMA commented that the proposal will enable firms to maintain qualified talent in essential positions without sacrificing compliance, security, or investor protection, and commended the Board for recognizing the value of the FINRA rule and quickly seeking to incorporate it into Texas' own regulations. The Board appreciates the support for this change.

LPL Financial and SIFMA strongly supported the proposal to amend §115.3 relating to waivers from examination requirements. LPL and SIFMA both believe the proposal is important for preserving their diverse pipelines of talent, by encouraging professionals who have departed the industry to return to the sector when life circumstances permit. The Board appreciates the support for this change.

LPL Financial and SIFMA also strongly supported the proposal to amend §115.10 to recognize the FINRA RIPP rule. SIFMA specifically commented that the proposal will enable Texas firms to participate in the RIPP without fear of violating Texas' supervisory requirements. Recognizing the RIPP, SIFMA states, will help industry retain its workforce and help demonstrate that technology can be used to perform required inspections of certain lower-risk locations remotely. Similarly, LPL stated that the RIPP will show that remote inspections are equally as effective as on-site inspections for low-risk branches. The Board appreciates the support for this change.

LPL Financial, SIFMA, the FPA, the IRI, and the financial professionals at LPL strongly supported the proposed new rule §115.24 to adopt Regulation BI and other conduct rules by reference. FPA expressed its strong support for the Board's commitment to harmonize federal and state securities laws and stated that the proposal will protect Texas retirement savers' and other retail consumers' interests while ensuring that its members are able to operate their businesses under a streamlined and effective regulatory regime. LPL appreciated the Board's approach to working with the industry during the rule review and drafting period to ensure that stakeholder comments are thoughtfully considered, which has resulted in a proposal that would further strengthen investor protections, create predictability, and streamline operations and compliance requirements. They also appreciated that Texas is "sensibly" adopting SEC rules by reference rather than using "misaligned language unique to the state," and also expressed that adoption by reference would remove any ambiguity about variations between state and federal securities laws. The Board appreciates the support for this new rule.

SIFMA specifically noted that the proposal ensures retail customers in Texas get the protection and benefits of this heightened standard while also giving the Board additional authority to address situations where a registered firm or professional falls short of this standard. It particularly appreciated that the language incorporates an existing national standard that is "working well" and noted that with many firms doing business in multiple states, a "single, uniform standard provides consistency, makes compliance efforts more efficient, and ensures client choice." The Board appreciates the commenters' support and feedback for this change.

FPA requested that the Board consider adopting a rule that would specifically prohibit registered professionals that are not dually registered with the agency as investment advisers or investment adviser representatives from using the words "advisor" or "adviser" in their names or titles. By way of background the SEC requested comments on whether it should adopt a rule prohibiting this activity as part of its request for comments on the Regulation BI proposal. The comments received in response to the SEC's request were mixed--some in support and others that opposed having a separate rule prohibiting the use of titles. After consideration the SEC ultimately determined that having a separate rule prohibiting titles was inadvisable and not needed for various reasons, including that Regulation BI's capacity disclosure obligation covered this activity. In addition to the SEC declining to adopt such a rule, NASAA has not yet adopted a model rule on this issue.

The Board agrees with the SEC that a separate rule on titling is not needed and inadvisable, as among other reasons, there are other potentially legitimate uses of these titles by registrants that are not dually registered as investment advisers. For these reasons the Board appreciates the suggestion of a new rule but declines to implement the recommended change. Staff will continue to monitor this issue and if staff recommends it, the Board may reconsider the need for a titling rule in the future.

This concludes the description of the public comments and the Board's responses.

The new rule and amendments are adopted under the authority of the Texas Government Code (TGC), §4002.151, as adopted by HB 4171, 86th Legislature, 2019 Regular Session, effective January 1, 2022. Section 4002.151 provides the Board with the authority to adopt rules as necessary to implement the provisions of the Texas Securities Act, including rules governing registration statements, applications, notices, and reports; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes. In addition, the amendments to §115.3 are adopted under the authority of TGC §4004.151. Section 4004.151 of the Act provides the Board with authority to waive examination requirements for any applicant or class of applicants.

The adopted new section and amendments affect the following sections of the Texas Securities Act: TGC Chapter 4004, Subchapters A - D, and F - G. The adopted amendment to §115.21 affects Chapter 4004, Subchapter H of the Act. The adopted amendment to §115.22 also affects TGC §4006.001 of the Act. The adopted amendment to §115.1 also affects TGC §4007.052 of the Act. The adopted amendments to §115.5 and §115.21 and adopted new rule §115.24 affect TGC §4007.105. Finally, the adopted amendment to §115.5 and adopted new rule §115.24 also affect TGC §4007.106. Statutes affected by adopted amendments to §§115.4, 115.8, and 115.16: none.

§ 115.1. General Provisions.

(a) Definitions. Words and terms used in this chapter are also defined in §107.2 of this title (relating to Definitions). The following words and terms, when used in this chapter, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Applicant--A person who submits an application for registration as a dealer or an agent.

(2) Branch office--Any location where one or more agents of a dealer regularly conduct the business of effecting any transactions in, or inducing or attempting to induce the purchase or sale of, any security, or that is held out as such.

(A) This definition excludes:

(i) any location that is established solely for customer service and/or back office type functions where no sales activities are conducted and that is not held out to the public as a branch office;

(ii) any location that is the agent's primary residence, provided that:

(I) only one agent, or multiple agents who reside at that location and are members of the same immediate family, conduct business at the location;

(II) the location is not held out to the public as an office and the agent does not meet with customers at the location;

(III) neither customer funds nor securities are handled at that location;

(IV) the agent is assigned to a designated branch office, and such designated branch office is reflected on all business cards, stationery, advertisements, and other communications to the public by such agent;

(V) the agent's correspondence and communications with the public are subject to the dealer's supervision;

(VI) electronic communications (e.g., e-mail) are made through the dealer's electronic system;

(VII) all orders are entered through the designated branch office or an electronic system established by the dealer that is reviewable at the branch office;

(VIII) written supervisory procedures pertaining to supervision of sales activities conducted at the residence are maintained by the dealer; and

(IX) a list of the residence locations are maintained by the dealer;

(iii) any location, other than a primary residence, that is used for securities business for less than 30 business days in any one calendar year, provided the dealer complies with the provisions of clause (ii)(II) - (VIII) of this subparagraph;

(iv) any office of convenience, where agents occasionally and exclusively by appointment meet with customers, which is not held out to the public as an office;

(v) any location that is used primarily to engage in non-securities activities and from which the agent(s) effects no more than 25 securities transactions in any one calendar year; provided that any advertisement or sales literature identifying such location also sets forth the address and telephone number of the location from which the agent(s) conducting business at the non-branch locations are directly supervised;

(vi) the floor of a registered national securities exchange where a dealer conducts a direct access business with public customers;

(vii) a temporary location established in response to the implementation of a business continuity plan; and

(viii) a location identified and designated with FINRA by the registered dealer as a residential supervisory location (RSL) in accordance with FINRA Rule 3110.19, and which location has been provided to FINRA in accordance with FINRA Rule 3110.19(d).

(B) Notwithstanding the exclusions in subparagraph (A) of this paragraph, any location other than an RSL that meets the requirements of §115.1(a)(2)(A)(viii) that is responsible for supervising the activities of persons associated with the dealer at one or more non-branch locations of the dealer is considered to be a branch office.

(C) The term "business day" shall not include any partial business day provided that the agent spends at least four hours on such business day at his or her designated branch office during the hours that such office is normally open for business.

(3) Supervisor--The person named by a dealer to supervise the activities of a branch office and registered as an agent with the Securities Commissioner.

(4) Control--The possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person or company, whether through the ownership of voting securities, by contract, or otherwise.

(5) In this state--As used in the Texas Securities Act, §§4001.052, 4001.056, 4004.051, and 4004.101, has the same meaning as the term "within this state" as defined in §107.2 of this title and paragraph (8) of this subsection.

(6) FINRA--The Financial Industry Regulatory Authority, created through the consolidation of NASD and the member regulation, enforcement, and arbitration functions of the New York Stock Exchange.

(7) Officer--A president, vice president, secretary, treasurer, or principal financial officer, comptroller, or principal accounting officer, or any other person occupying a similar status or performing similar functions with respect to any organization or entity, whether incorporated or unincorporated.

(8) Within this state or in this state--

(A) A person is a "dealer" who engages "within this state" or "in this state" in one or more of the activities set out in the Texas Securities Act, §4001.056 or §4004.051, if either the person or the person's agent is present in this state or the offeree/purchaser or the offeree/purchaser's agent is present in this state at the time of the particular activity. A person can be a dealer in more than one state at the same time.

(B) Likewise, a person is an "agent" who engages "within this state" or "in this state" in one or more of the activities set out in the Texas Securities Act, §4001.052 or §4004.101, whether by direct act or through subagents except as otherwise provided, if either the person or the person's agent is present in this state or the offeree/purchaser or the offeree/purchaser's agent is present in this state at the time of the particular activity. A person can be an agent in more than one state at the same time.

(C) Offers and sales can be made by personal contact, mail, telegram, telephone, wireless, electronic communication, or any other form of oral or written communication.

(9) Finder--An individual who receives compensation for introducing an accredited investor to an issuer or an issuer to an accredited investor solely for the purpose of a potential investment in the securities of the issuer, but does not participate in negotiating any of the terms of an investment and does not give advice to any such parties regarding the advantages or disadvantages of entering into an investment, and conducts this activity in accordance with §115.11 of this title (relating to Finder Registration and Activities). Note that an individual registered as a finder is not permitted to register in any other capacity; however, a registered general dealer is allowed to engage in finder activity without separate registration as a finder.

(10) Texas crowdfunding portal--Any person registered as a Texas dealer pursuant to §115.19 of this title (relating to Texas Crowdfunding Portal Registration and Activities) or §115.20 of this title (relating to Texas Crowdfunding Portal Registration and Activities of Small Business Development Entities).

(b) Registration requirements of dealers, issuers, and agents, and notice filings for branch offices.

(1) Requirements of registration or notice filing.

(A) No dealer, issuer, or agent of a dealer or issuer shall sell or offer for sale any securities within this state without first being registered as a dealer or agent, or exempt from registration.

(B) Each branch office in Texas must make a notice filing to become designated as a branch office of a dealer. A registered officer, partner, or agent must be named as supervisor.

(2) Persons not required to register as an agent.

(A) Registration as an agent is not required for a person, associated with a dealer registered in Texas, who effects a transaction pursuant to the Securities Exchange Act of 1934, §15(i)(3), (15 U.S.C. Sec. 78o(i)(3)), provided such person is:

(i) not ineligible to register with this state for any reason other than such a transaction; and

(ii) registered with a registered securities association and at least one other state.

(B) For purposes of this paragraph, a person is "ineligible to register with this state," if the person:

(i) has been convicted of a securities-related felony; or

(ii) has been convicted of a theft-related felony.

(C) For purposes of this paragraph, a "registered securities association" is one currently recognized as such by the SEC pursuant to the Securities Exchange Act of 1934, §15A.

(1) General registration. A general registration is a registration to deal in all categories of securities, without limitation

(2) Restricted registration. The restricted registrations are as follows:

(A) The Securities Commissioner recognizes the specialized knowledge examinations administered by FINRA as restricted registration categories. The registration of an applicant passing a specialized knowledge examination in lieu of the general securities examination pursuant to §115.3(b) of this chapter (relating to Examination) is restricted to and effective only for conducting the business and securities activities and effecting transactions associated with the specialized examination.

(B) Additional restricted registration categories include:

(i) registration to deal exclusively in the sale of interests (other than interests in limited partnerships) in oil, gas, and mining leases, fees, or titles or contracts relating thereto;

(ii) registration to deal exclusively in real estate syndication interests and/or condominium securities, including interests in real estate limited partnerships;

(iii) registration to deal exclusively in sales of securities to the dealer's own employees;

(iv) registration for an issuer to deal exclusively in its own securities;

(v) registration to act exclusively as a finder;

(vi) registration to act exclusively as a Texas crowdfunding portal; and

(vii) registration with other restrictions which the Securities Commissioner may impose based upon the facts.

(3) In restricted registrations, the evidence of registration shall indicate that the holder thereof is entitled to act as a dealer only in the specified issue or category of securities.

(d) Prohibition on fraud and availability of an exemption from registration. The Texas Securities Act prohibits fraud or fraudulent practices in dealing in any manner in any securities whether or not the person engaging in fraud or fraudulent practices is required to be registered. The Agency has jurisdiction to investigate and bring enforcement actions to the full extent authorized in the Texas Securities Act with respect to fraud or deceit, or unlawful conduct by a dealer or agent in connection with transactions involving securities in Texas. However, the registration requirements detailed in this chapter do not apply to dealers and agents that are exempt from registration as such pursuant to the Texas Securities Act, Chapter 4005, Subchapter A, or by Board rule pursuant to the Texas Securities Act, §4004.001 or §4005.024, contained in Chapter 109 or 139 of this title.

The agency certifies that legal counsel has reviewed the adoption and found it to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on February 21, 2025.

TRD-202500657

Travis J. Iles

Securities Commissioner

State Securities Board

Effective date: March 13, 2025

Proposal publication date: November 8, 2024

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

CHAPTER 116. INVESTMENT ADVISERS AND INVESTMENT ADVISER REPRESENTATIVES

7 TAC §§116.1 - 116.6, 116.8, 116.9, 116.15, 116.16, 116.21

The Texas State Securities Board adopts amendments to §116.1, concerning General Provisions; §116.2, concerning Application Requirements; §116.3, concerning Examination; §116.4, concerning Evidences of Registration; §116.5, concerning Minimum Records; §116.6, concerning Registration of Persons with Criminal Backgrounds; §116.8, concerning Fee Requirements; §116.9, concerning Post-Registration Reporting Requirements; and §116.16, concerning Use of Senior-Specific Certifications and Professional Designations. The Board also adopts amendments to §116.15, concerning Advertising Restrictions, which includes renaming the caption of the section to read "Adoption by Reference of Investment Adviser Marketing Rules." Additionally, the Board adopts amendments to §116.21, concerning System Addressing Suspected Financial Exploitation of Vulnerable Customers Pursuant to the Texas Securities Act, Section 45, which also includes renaming the caption of the section to read "System Addressing Suspected Financial Exploitation of Vulnerable Customers Pursuant to the Texas Securities Act, Chapter 4004, Subchapter H."

The proposals were published in the November 8, 2024, issue of the Texas Register (49 TexReg 8822), and corrected in the December 20, 2024, issue of the Texas Register (49 TexReg 10440). The amendment to §116.3 was adopted with changes to the published proposal and will be republished. The change consisted of removing the quotations from "CIMA" in subsection (c)(2)(E) for consistency with how the professional designations in subsection (c)(2)(B) - (F) of this section are abbreviated. The amendments to §§116.1, 116.2, 116.4 - 116.6, 116.8, 116.9, 116.15, 116.16, and 116.21 were adopted without changes and will not be republished.

The rules in 7 TAC Chapter 116 govern investment advisers and investment adviser representatives. The purpose of the amendments to eleven rules in this chapter is to implement changes pursuant to the agency's periodic review of its rules. These changes improve the readability, consistency, and clarity of the rules in this chapter, and ensure the rules are current, accurate, and conform to the codified version of the Texas Securities Act (Act), which promotes transparency and efficient regulation.

The references to sections of the Act in §§116.1, 116.3, 116.4, 116.8, 116.16, and 116.21 are updated to refer to the correct sections in the codified version of the Act in the Texas Government Code. The codification was adopted by HB 4171, 86th Legislature, 2019 Regular Session, and became effective January 1, 2022, (HB 4171).

Sections 116.1 and 116.2 are amended to replace the references in those sections to the term "Securities and Exchange Commission" with the term "SEC." SEC is a defined term in §107.2, concerning Definitions.

Section 116.1 is amended to add references to "solicitor" in subsection (b) for clarification and to delete redundant language in subsection (b)(2)(D) that is also contained in §116.1(d). A reference to the Form U4 is added to subsection (b)(2)(C) for accuracy and consistency, and a reference to "notice filed" with the Securities Commissioner is added for clarity and accuracy.

Section 116.2 is also amended to replace the reference to "North American Securities Administrators Association" with the term "NASAA" in subsection (a)(1). NASAA is a defined term in §107.2, concerning Definitions. Section 116.2(a) is also amended to abbreviate Financial Industry Regulatory Authority to "FINRA," which is a defined term in §107.2, concerning Definitions. In addition, §116.3(b)(1) is amended to update the names of two NASAA examinations.

A cross reference to §116.22 is added to §116.2 to improve consistency and readability of provisions governing application requirements. Subsection (d) is amended to allow the agency registration staff the option to notify applicants by email (which is a faster and more reliable delivery method) rather than by certified mail of automatic withdrawal of applications that have been pending for more than 90 days. This change facilitates the internal processing of registration applications by reducing the use of staff resources. References to "certificate of formation" which is the name of the form used by the Texas Secretary of State for formation documents filed with it, are also added to the respective lists of formation of organization documents (including articles of incorporation, partnership agreements, articles of association, and charters) found in §116.2(a)(2)(A), as well as in §116.5(b)(3), for clarity and to improve accuracy.

Section 116.3(b)(2) is also amended to reflect that the Form U-10 is no longer in use by FINRA. In addition, §116.3 is also amended to add new subsection (c)(3)(A) and (c)(3)(B) to recognize and grant waivers of examination or reexamination requirements for certain classes of applicants who are participating in FINRA's Maintaining Qualifications Program (MQP) or NASAA's Exam Validity Extension Program (EVEP) and meet other requirements. Section 116.3 is also amended to add subsection (c)(3)(C) to recognize and grant waivers of examination requirements for applicants who have received an examination waiver from FINRA.

The amendments to §116.3(c) provide greater coordination with other securities regulators and reduce the application processing time for eligible applicants and compliance costs for their firms. Waivers will be processed with more consistency, uniformity, and transparency.

In addition to the amendments to §116.3(c), §116.3(d) is amended to update the rule to more accurately reflect the Texas securities law examination process, and to specifically direct applicants with questions about the process to the Registration Division for information, which increases transparency. This subsection is also amended to impose a one-week waiting period to retake the examination for applicants who failed the exam to provide and encourage more time to study prior to retaking the exam.

Section 116.3 includes certain waivers from examination requirements for investment adviser applicants who have one or more of five different professional designations found in subsection (c)(2)(B) - (F). The former rule required these organizations to submit changes in their certification programs to the Securities Commissioner. The section is amended in subsection (c)(3) to remove this requirement which is no longer needed because a NASAA project group which monitors these programs has assumed this responsibility. This group, which maintains a list of eligible professional designations, has recently replaced a designation which is no longer active with a new eligible designation. In light of this change the section is also amended in subsection (c)(2)(E) to replace the reference to the inactive "CIC" designation with the new "CIMA" designation and update the reference to another designation located in subsection (c)(2)(F).

Section 116.8, which relates to fee requirements, is also amended to remove an incorrect reference in subsection (a) to fees for officers and partners of an investment adviser, to update the reference to the agency's website, and to clarify that persons seeking information on fee requirements may contact the Registration Division of the agency.

Section 116.9, which sets out events that a registered investment adviser or investment adviser representative must report to the Securities Commissioner after registration, is amended in paragraph (a)(3) to clarify that misdemeanor offense actions that are listed in §116.6(c) of this chapter must be reported. In addition, §116.9(a)(6) is amended to clarify that registered entities must notify the Commissioner of changes in legal status of their entities. These amendments apprise investment advisers and investment adviser representatives of their obligations under the Act which promotes transparency.

Section 116.15, which was last amended in 2001, prohibits investment advisers registered in Texas from using testimonials in their advertisements and includes other advertising restrictions, mirroring (but not adopting by reference) SEC rules governing advertising that were in effect when the rule was adopted. The SEC Marketing Rule, which regulates how investment advisers registered with the SEC (SEC RIAs) may advertise their services, was amended in 2020, with a final compliance date of November 4, 2022. In addition to replacing the prior version of the SEC Marketing Rule, the SEC also rescinded the former SEC Cash Solicitation Rule (formerly found at 17 CFR §275.206(4)-3) and moved those disclosure and other regulatory requirements that also apply to persons who act as solicitors for SEC RIAs from that rescinded rule to the new SEC Marketing Rule. However, these new and updated rules for solicitation activities are less stringent and have been relaxed compared to the prohibitions and restrictions that were set forth in the former Cash Solicitation Rule.

The changes to these two SEC rules represented a broad, sweeping change in how the SEC regulates direct and indirect advertising and marketing activities, including solicitation activities, of SEC RIAs, including the SEC RIAs doing business in Texas. The SEC rules have always prohibited advertising practices that are untrue, misleading, or deceptive. The new SEC rules relax prohibitions on certain types of practices, now allowing among other things, the use of endorsements or testimonials with certain safeguards. The SEC rules also improve investor confidence and transparency by providing clearer guidelines concerning permitted marketing practices and by increasing disclosure requirements to investors.

During the rule review of Chapter 116 the agency received two comment letters from the regulated industry requesting that §116.15 be amended to remove the current advertising restrictions in the section and instead harmonize it with the more flexible new and updated SEC Marketing Rule. The staff and Board agreed with the comments. In response, this section is renamed and amended to adopt by reference the current SEC rules concerning marketing practices, while removing the existing regulatory restrictions in that section. This amendment puts advisers registered in Texas on a more level playing field with the SEC RIAs doing business in Texas because they now have the option to use testimonials and endorsements in their marketing and advertising as long as they otherwise comply with other applicable rules in Chapter 116. It also conforms rules relating to marketing practices to model rules which adopt the SEC advertising rules by reference which have been adopted by other state securities regulators. The amendment however does not change the registration requirements applicable to solicitors set forth in §116.1(b)(A).

A related adoption amends the investment adviser recordkeeping requirements in §116.5 to require investment advisers to create and keep records to verify compliance with SEC Marketing Rule requirements.

The amendments to §116.15 and §116.5 further the mission of the Board and the purposes of the Act by maximizing coordination with federal and other states' securities laws and administration by harmonizing the Board rules with SEC rules so that the same advertising rules are applicable under the Act as well as SEC rules. The amendments also further the Board's mission and Act's purposes to minimize regulatory burdens on Texas investment advisers, while ensuring that investors are adequately protected by ensuring they can make informed decisions.

Section 116.21 is also renamed to refer to the applicable section of the codified Act.

The Board received four public comment letters regarding the rulemaking in Chapter 116. One letter was from the corporate office of LPL Financial, a registered broker-dealer firm. A second letter was from 365 of LPL's financial professionals in Texas. The other two support letters were from securities industry trade groups: Investment & Wealth Institute (IWI) and the Securities Industry and Financial Markets Association (SIFMA). LPL Financial, LPL's financial professionals, and SIFMA expressed general support for the proposals, while IWI noted its specific support for the addition of the CIMA designation in §116.3 to the list of certifications granted a waiver from the examination requirements for registration as an investment adviser representative. The Board appreciates the support expressed by these commenters.

LPL Financial and SIFMA strongly supported the proposal to amend §116.3 relating to waivers from examination requirements. LPL and SIFMA both believe the proposal is important for preserving their diverse pipelines of talent, by encouraging professionals who have departed the industry to return to the sector when life circumstances permit.

The Board appreciates the support for this change.

Related to the amendment in §116.15 to adopt by reference the SEC Marketing Rule, LPL Financial noted that the "SEC's Marketing Rule provided important clarity for investment advisers when marketing their services and subsequent state adoption removes ambiguity around previous guidance for advertising services." The Board appreciates this comment on the amendment.

This concludes the description of the public comments and the Board's responses.

The amendments are adopted under the authority of the Texas Government Code (TGC), §4002.151, as adopted by HB 4171. Section 4002.151 provides the Board with the authority to adopt rules as necessary to implement the provisions of the Act, including rules governing registration statements, applications, notices, and reports; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes. In addition, the amendments to §116.3 are also adopted under the authority of TGC, §4004.151 of the Act. Section 4004.151 provides the Board with authority to waive examination requirements for any applicant or class of applicants. Finally, the amendments to §116.1 are also adopted under the authority of TGC, §4004.001 of the Act. Section 4004.001 provides the Board with the authority to prescribe new dealer, agent, investment adviser, or investment adviser representative registration exemptions by rule.

The adopted amendments affect the following sections of the Texas Securities Act: TGC Chapter 4004, Subchapters B - F, and H. The adopted amendments to §§116.1, 116.2, 116.4, 116.5, 116.9, 116.15, and 116.16 also affect TGC Chapter 4007, Subchapter B of the Act. The adopted amendments to §§116.1, 116.5, 116.9, 116.15, and 116.16 also affect TGC §4007.105 and §4007.106 of the Act.

§ 116.3. Examination.

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

(b) Examinations accepted.

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

(A) the NASAA Uniform Investment Adviser Law Examination (Series 65); or

(B) the following combination of examinations:

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

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

(2) The examinations (except the Texas Securities Act examination) listed in paragraph (1) of this subsection are administered by FINRA.

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

(2) A full waiver of the examination requirements of the Texas Securities Act, §4004.151, is granted by the Board to the following classes of persons:

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

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

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

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

(E) applicants who are designated by the Investment & Wealth Institute as Certified Investment Management Analysts (CIMA);

(F) applicants who are designated by the American College of Financial Services as chartered financial consultants (ChFC);

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

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

(3) The following classes of persons are granted a partial waiver by the Board of the examination requirements of §4004.151 of the Act and subsection (a) of this section:

(A) NASAA Exam Validity Extension Program ("EVEP"). Applicants who previously took and passed the NASAA qualification examinations accepted in subsection (b) of this section whose registration with another state securities regulator has not lapsed for more than five years who have participated in the EVEP and have maintained compliance with the EVEP requirements are granted a waiver of the NASAA qualification examination requirements of this section.

(B) FINRA Maintaining Qualifications Program ("MQP"). Applicants whose registration with FINRA and with another state securities regulator have not lapsed for more than five years, who have participated in the MQP and maintained compliance with the MQP requirements are granted a waiver of the corresponding appropriate FINRA qualifying examinations requirement(s) in this section.

(C) FINRA Examination Waivers. Applicants who have received a waiver of any examination requirement(s) by FINRA, are granted a waiver of the corresponding examination requirement(s) in this section.

(D) Successful participation in the MQP shall not extend to the Series 65 or Series 66 for purposes of investment adviser representative registration.

(4) A partial waiver of the examination requirements of the Texas Securities Act, §4004.151, is granted by the Board to solicitor applicants. Such persons are required to pass only an examination on state securities law.

(5) The Securities Commissioner in his or her discretion is authorized by the Board to grant full or partial waivers of the examination requirements of the Texas Securities Act, §4004.151.

(d) Texas securities law examination.

(1) The fee for each filing of a request to take the Texas securities law examination is $35. An admission letter issued by the Board is required for all entrants. The examination is given at the main office of the State Securities Board in Austin and at the Agency's branch offices.

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

(3) The passing score for all applicants on the examination on the Texas Securities Act is 70%. An applicant who fails the examination on the Texas Securities Act may request to retake the examination no sooner than after one week from the date of the examination. The applicant must bring his or her application up to date before retaking an examination.

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

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

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

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

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

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

(5) Information about taking the examination and how to apply to take the examination in Austin or at an Agency branch office is available on the Agency's website located at www.ssb.texas.gov or by contacting the Registration Division of the State Securities Board.

The agency certifies that legal counsel has reviewed the adoption and found it to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on February 21, 2025.

TRD-202500658

Travis J. Iles

Securities Commissioner

State Securities Board

Effective date: March 13, 2025

Proposal publication date: November 8, 2024

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