State of Washington
DEPARTMENT OF FINANCIAL INSTITUTIONS
DIVISION OF SECURITIES
P.O. Box 41200 ⚫ Olympia, Washington 98504-1200 Telephone (360) 902-8760 ⚫ TDD (360) 664-8126 ⚫ FAX (360) 902-0524 ⚫ http://www.dfi.wa.gov

October 9, 2026

Concise Explanatory Statement Pursuant to RCW 34.05.325(6)

This Concise Explanatory Statement concerns amendments to the investment adviser rules at Chapter 460-24A WAC.

Agency reasons for adopting the rules. (RCW 34.05.325(6)(a)(i))

The reasons stated in the Form CR-102 filed on July 15, 2026 in connection with this rulemaking are hereby incorporated by reference. The Form CR-102 is published at WSR 26-15-068.

Describe differences between the text of the proposed rules as published in the Washington State Register and the text of the rules as adopted, other than editing changes, stating the reasons for differences. (RCW 34.05.325(6)(a)(ii))

As discussed below, the Securities Division revised the proposed text of WAC 460-24A-051(6) to change the compliance date of the errors and omissions insurance requirement from January 1, 2027 to January 1, 2028.

The Securities Division revised the proposed text of WAC 460-24A-121(2)(d)(iii) to replace the phrase “take action regarding” with “identify the occurrence of.” The Securities Division revised the proposed text of WAC 460-24A-121(2)(d)(iv) to replace the phrase “maintain plans for resilience and to restore any capabilities or services that were impaired due to an information security event” to “take action regarding a detected information security event.” These changes conform to the language of the NASAA Model Rule for Investment Adviser Written Policies and Procedures.

The Securities Division revised the proposed text of WAC 460-24A-123(2)(b)(iii) to add the phrase “that you hold in your records so long as you receive the confirmation or statements.” This phrase is consistent with the NASAA Model Rule for Investment Adviser Written Policies and Procedures and had been inadvertently omitted.

For clarity and consistency with the Section 3 of the NASAA Model Rule for Investment Adviser Written Policies and Procedures, the Securities Division revised the subsection numbering in WAC 460-24A-125. Previously, WAC 460-24A-125 had subsections (1) to (4). The final rule has subsections (1)(a) to (d), and (2). The Securities Division also moved a sentence that was initially located within what is now subsection (1)(b) to a standalone subsection (2), and added minor clarifying language. These changes clarify that subsection (1)(a) to (d) apply only to registered investment advisers that vote client securities, whereas subsection (2) applies to registered investment advisers that do not vote client securities.

The Securities Division revised the proposed text of WAC 460-24A-205(1)(g) to specify how advisers may demonstrate annual proof of insurance of errors and omissions insurance. The revised language conforms WAC 460-24A-205(1)(g) to the language in WAC 460-24A-050(6)(a)(ii)(F).

Summary of comments received by DFI during the rulemaking process, and DFI’s responses to the comments. (RCW 34.05.325(6)(a)(iii))

I. Written Comments

The Securities Division received five written comments in response to the Form CR-101: Preproposal Statement of Inquiry (Form CR-101) filed with the Code Reviser’s Officer on April 14, 2025. The following persons submitted written comments: Elliott Appel of Kindness Financial Planning LLC, Nathan Bender of Black Bishop Financial Group; Jamie Clark of Ruby Pebble Financial Planning LLC, Dave Neuman of Israels & Neuman PLC, and Brian Thorp of Wealthtender, Inc.

The Securities Division received eight written comments in response to the rules proposed in the Form CR-102: Proposed Rule Making (Form CR-102) filed with the Code Reviser’s Office on July 15, 2026. The following persons submitted written comments: Sean Cooper of Fit Financial Consulting LLC, Thomas Gerson of Blair Hall Advisors, Maria Kuitula of Wordhouse Wealth Coaching, Dave Neuman of Israel & Neuman PLC, Darlene Pasieczny of Pasieczny Law LLC, Kevin Reed of Diogenes Financial, Dwayne Reinike of Valiant Financial Planning, and Jospeh Wojciechowski of PIABA.

We discuss the comments received by subject matter below.

Comments Regarding Form CR-101

SEC Marketing Rule, Rule 204(6)-1

The Securities Division received four comments requesting that the Securities Division revise its advertising rule at WAC 460-24A-100 to adopt the SEC Marketing Rule, Rule 204(6)-1. The SEC Marketing Rule became effective May 4, 2021. The commenters stated that Washington’s current advertising rule disadvantages Washington-registered advisers because it prohibits them from using testimonials to advertise their businesses in Washington. In contrast, federal covered advisers may currently advertise using testimonials in Washington consistent with the SEC Marketing Rule. In response to the comments, and in accordance with NASAA’s adoption on May 4, 2026 of amendments to the advertising provisions of the NASAA Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers Model Rule, the Securities Division subsequently proposed in the Form CR-102 to amend WAC 460-24A-100 to adopt the provisions of the SEC Marketing Rule.

E&O Insurance

The Securities Division received one comment requesting that the Securities Division adopt a requirement that investment advisers maintain errors and omissions insurance policies. In response to the comment, the Securities Division subsequently proposed in the Form CR-102 to adopt a rule at WAC 460-24A-051 to require investment advisers to maintain such insurance and to amend WAC 460-24A-050 and WAC 460-24A-205 to require the filing of annual proof of insurance.

Unethical Business Practice – Unpaid Arbitration Awards

The Securities Division received one comment requesting that the Securities Division revise its unethical business practices rule at WAC 460-24A-220 to make it an unethical business practice for an investment adviser or investment adviser representative to fail to pay an arbitration award. In response to the comment, and in accordance with the NASAA Model Rule for Unpaid Arbitration Awards, the Securities Division subsequently proposed to amend its unethical business practices rule at WAC 460-24A-220 to include failure to paid arbitration awards as an unethical business practice.

Civil Liability for Violation of RCW 21.20.020

The Securities Division received one comment requesting that the Securities Division amend the Securities Act of Washington to provide civil liability under RCW 21.20.430 for violating RCW 21.20.020, the anti-fraud provision that applies to one person advising another. The Securities Division cannot amend the liability provisions of the Securities Act by rulemaking. However, at a future date, the Securities Division may reconsider this request if the Division brings forward a bill to amend the Securities Act of Washington.

Comments Regarding Form CR-102

Adoption of Investment Adviser Representative Continuing Education (IAR CE) Requirement at WAC 24A-056

The Securities Division proposed to adopt a new rule at WAC 460-24A-056 to adopt the NASAA Model Rule on Investment Adviser Continuing Education, which would require investment adviser representatives (IARs) registered in Washington to complete annual continuing education credits to maintain their registration. The Securities Division received four comments regarding the proposal.

One commenter specifically asked the Securities Division to refrain from adding a continuing education requirement, stating that continuing education is “a complete waste of time and most of us already have multiple requirements for [continuing education].”

Four commenters provided suggestions regarding the applicability of credits earned to satisfy other continuing education requirements to the new state requirement:

• One commenter suggested that any continuing education that is completed for other designations or state licenses be accepted as continuing education in Washington.

• One commenter requested that anyone who holds a CFP designation and complies with the CFP’s continuing education requirements receive an exemption from additional state continuing education requirements.

• Two commenters encouraged the Securities Division to confirm that investment adviser representatives who complete continuing education from NASAA-authorized providers for other states or their home state will receive full credit toward Washington's requirement, without duplicative coursework or reporting.

The Securities Division made no changes to the final rule. As drafted, WAC 460-24A-056 substantially satisfies the concerns of the commenters regarding the applicability of credits to multiple continuing education requirements. Under WAC 460-24A-056(3), IARs may satisfy the Washington continuing education requirement using continuing education credits earned during the same period to satisfy mandatory continuing education requirements to a maintain a credential that qualifies a person for an examination waiver under WAC 460-24A-050(3), provided the credits are approved investment adviser continuing education content as defined by WAC 460-24A-005(3). The CFP designation qualifies for an examination waiver in Washington. Under WAC 460-24A-056(7), an IAR who complies with the continuing education requirements in the IAR’s home state will be considered to be in compliance with Washington’s continuing education requirement if the home state’s requirements for continuing education are the same as the requirements in Washington and the IAR is in compliance with those requirements. Finally, WAC 460-24A-056(2) provides that an IAR that is dual-registered as a salesperson of a FINRA-member broker-dealer and is compliance with FINRA continuing education requirements is considered to be in compliance with the IAR products and practice content requirement, provided that the FINRA continuing education content meets the baseline requirements set forth in WAC 460-24A- 056(2)(a) – (c).

We recognize that the Model Rule does not provide a blanket exemption from continuing education requirements for holders of the CFP or other credentials. However, IARs may use any NASAA-approved continuing education credits to satisfy the Washington continuing education requirement, and may potentially apply those credits to satisfy continuing education requirements to maintain a credential. We anticipate that providers of continuing education courses will seek approval from both NASAA and other credentialing organizations, because IARs are likely to seek out courses with dual approval. We believe IARs will reduce their cumulative compliance burden by strategically seeking credits that are approved to satisfy multiple continuing education requirements, if applicable to the adviser.

Continuing education requirements promote investor protection, and the adoption of the Model Rule will create uniformity with existing continuing education requirements in other states. According to https://www.nasaa.org/industry-resources/investment-advisers/investment-adviser-representative-continuing-education/iar-ce-map/, at least 25 states have adopted investment adviser representative continuing education pursuant to the NASAA Model Rule. We do not believe it would be appropriate to create any state-specific exemptions that are not uniform with the Model Rule. For these reasons, the Securities Division made no changes to the final rule.

Adoption of Requirement to Maintain Errors and Omissions Insurance at WAC 460-24A-051

The Securities Division proposed the adoption of a requirement at WAC 460-24A-051 for Washington-registered investment advisers to maintain an errors and omissions insurance policy of at least $1 million. The Securities Division received two critical comments and three supportive comments. The Securities Division also received testimony at the rulemaking hearing in support of the proposal.

Comments Critical of an Errors and Omissions Insurance Requirement

Two commenters stated the errors and omissions insurance requirement would increase expenses for investment advisers, with one stating that the requirement would be a “major burden to small advisers with minimal benefit except to insurance companies” and that it would be “a massive expense to smaller adviser firms.” One commenter criticized that the $1 million coverage requirement would be the same for every adviser regardless of its assets under management. This commenter opined that the minimum net worth requirement for advisers with discretion is sufficient to allow recovery of assets from negligent acts, and that a “$1 million error is wildly above the scope of most state-registered advisers.” This commenter noted that errors and omissions insurance would not cover cybersecurity risks, fraud, or intentional misconduct.

Two commenters requested that the Securities Division create an exemption from the insurance requirement. One commenter suggested the Securities Division exempt single-employee investment advisers without custody, or advisers with de minimis assets under management. The other commenter suggested the Securities Division limit the insurance requirement to firms with custody, disciplinary history, financial concerns, or other elevated risks, or allow alternative methods of demonstrating financial responsibility.

Comments Supportive of an Errors and Omissions Insurance Requirement

Three commenters, including the Public Investors Advocate Bar Association (PIABA), supported the errors and omissions insurance requirement. The commenters noted that mandatory errors and omissions insurance will increase the likelihood that investors by investment advisers can recover damages after unlawful conduct.

One commenter argued that the coverage amount should be higher. The commenter presented representative examples of investors harmed by investment advisers and unable to recover damages due to the adviser’s inadequate insurance coverage. This commenter suggested that the level of errors and omission insurance should depend on the amount of the adviser’s assets under management, with $1 million coverage being the absolute minimum for smaller investment advisors. This commenter also attended the rulemaking hearing and testified in support of the proposal. At the hearing, as discussed in Section II below, the commenter stated that his research estimated that costs of errors and omissions insurance for investment advisers is $1,000 to $3,000 annually, and noted that there are other occupationsin Washington that require insurance coverage. The commenter testified that qualified custodians often require that investment advisers maintain errors and omissions insurance.

Another commenter noted that “insurance policies help pay defense costs, resolve a dispute, and enable business continuation.” The commenter stated that the adoption of the requirement would “serve [Washington’s] retirees and other retail public investors.” The commenter noted the “enormous responsibility an investment adviser has for their clients, who may have agreed to allow their life savings to be managed by the adviser.” The commenter observed that solo investment advisers with minimum net capital and a $10,000 surety bond operating out of a home office without any employees or direct supervisors may nonetheless manage millions of dollars in assets for dozens of clients. The commenter stated: “A negligent breach of duty such as recommending an investment strategy that is inappropriate for that particular investor, failing to timely execute a transaction, or recommending an inappropriately risky investment without conducting adequate due diligence, can cause loss of a client’s entire retirement savings.”

Two commenters cited a study1 to address concerns regarding whether the cost of mandatory errors and omissions insurance would limit access to investment advisers. The study found no material effect on the number of investment advisers registered in Oregon or Oklahoma after those states adopted mandatory errors and omissions insurance requirements for investment advisers.

The Securities Division weighed the comments received for and against the adoption of mandatory errors and omissions insurance coverage. With respect to costs, as noted above, testimony at the rulemaking hearing represented that costs of errors and omissions insurance for investment advisers to be between $1,000 to $3,000 annually. This figure is consistent with the data collected by the Securities Division in its small business economic impact survey. The survey asked investment advisers who currently maintain errors and omissions insurance to indicate the annual cost of their policies. Removing one response that was an outlier, the average annual cost of errors and omissions insurance per employee was $1,572.63. If the outlier was left in, the average annual cost per employee was $2,435.22. While this represents an expense, many advisers (87% of respondents in the small business economic impact survey) already maintain errors and omissions insurance.

The Securities Division considered the commenters’ suggestions to limit the insurance requirement to larger investment advisers, or advisers with custody or other heightened risk factors. The mandatory errors and omissions insurance requirements for investment advisers in Oregon and Oklahoma are substantially similar, and the Securities Division modeled its rule after these

[1] Adam J. Gana & Benjamin P. Edwards, The Insurance Solution for Financial Advice Failures, 14 Mich. Bus. & Entrepreneurial L. Rev. 1 (2025)

provisions with the intention of promoting uniformity. Oregon and Oklahoma do not provide exceptions from insurance coverage for small advisers. As one comment letter suggested, solo advisers may present risks to investors based on their lack of other employees or supervisors. We believe it would be inappropriate to exempt small advisers from insurance coverage requirements.

The Securities Division considered whether to limit the insurance requirement to advisers with their principal place of business in Washington, but determined that this may disadvantage advisers located in Washington who must compete with out-of-state advisers. In addition, this would reduce protection for Washington residents who receive investment advice from Washington-registered investment advisers whose principal place of business is located outside of Washington.

After evaluating the comments and testimony received, the Securities Division will proceed with the adoption of an errors and omissions insurance requirement applicable to all Washingtonregistered investment advisers. However, to allow reasonable time for advisers to obtain insurance coverage, the Securities Division revised WAC 460-24A-051(6) to extend the compliance date by one year. The initial compliance date in the final rule is now January 1, 2028.

Errors and Omissions Insurance – Clarification of Filing Requirements

In connection with the errors and omission insurance requirement at WAC 460-24A-051, the Securities Division proposed a requirement to file proof annual renewal of insurance at WAC 460-24A-205(1)(g) and a requirement at WAC 460-24A-205(1)(f) to file notice if the insurance policy is materially amended.

The Securities Division received one comment that requested clarification regarding the filing requirements. The commenter recommended that the Securities Division “confirm[] the postrenewal proof requirement may be satisfied by a declarations page or certificate of coverage rather than the full policy.” The commenter also requested that the Securities Division define what constitutes a “substantially modified” insurance policy that would require filing an amendment under WAC 460-24A-205(1)(f), to clarify that routine endorsements or other non-substantive changes do not trigger a notice filing.

In response to the comment received, the Securities Division amended WAC 460-24A-205(1)(g) to conform to WAC 460-24A-050(6)(a)(ii)(F) by clarifying that advisers may demonstrate annual proof of insurance by submitting a policy declaration page or a certificate of liability coverage specifying errors and omissions coverage.

The Securities Division confirms that the amendment filing requirement at WAC 460-24A- 205(1)(f) applies to cancellations, terminations, and substantial modifications of policies. Substantial modifications include a reduction in coverage amount, a material narrowing of covered advisory activities, any change that would result in the investment adviser no longer meeting the insurance requirement under WAC 460-24A-051, and other material modifications of the errors and omissions insurance coverage. Non-substantive changes would not necessitate an amendment.

Unethical Business Practices – Unpaid Arbitration Awards at WAC 460-24A-220(27) to (29)

In accordance with the NASAA Model Rule for Unpaid Arbitration Awards, the Securities Division proposed to revise the unethical business practice rule at WAC 460-24A-220 to make it an unethical business practice for investment advisers and investment adviser representatives to fail to pay certain outstanding arbitration awards, final judgments, or regulatory fines and penalties. The Securities Division received three comments in support of the amendment. The Securities Division also received testimony at the rulemaking hearing in support of the amendment. As the commenters supported the amendments, we made no changes to the final rule.

Filing of Business Continuity Plan at WAC 460-24A-050(6)(a)(ii)(E)

The Securities Division proposed to amend WAC 460-24A-050 to add a provision at subsection (6)(a)(ii)(E) to require investment advisers to file the business continuity plan required by WAC 460-24A-126. The Securities Division also proposed to amend WAC 460-24A-205 to add a requirement at subsection (1)(h) to file material amendments to the business continuity plan. The Securities Division received two comments critical of the proposal.

The two commenters expressed that it would be a burden to file the business continuity plan. One of these commenters expressed concern regarding sensitive details regarding operations and contact information in the business continuity plan, and noted that firms would be required to determine what constitutes a material change to necessitate filing an amended plan.

The two commenters each suggested alternate procedures to avoid filing the business continuity plan:

• One commenter suggested the Securities Division accept “annual certification that a plan meeting WAC 460-24A-126 is in place and has been reviewed, a short filing identifying emergency contacts and succession arrangements, and production of the complete plan upon examination, specific request, or an actual emergency.”

• One commenter suggested that rather than filing the business continuity plan, “small firms should instead be permitted to maintain these plans internally, certify annually that they are current, and provide them during an examination or upon request.”

Since 2014, the Securities Division has required investment advisers to maintain a business continuity plan. 2 In recent years, the Securities Division has twice been required to assist with winding down a solo investment adviser firm due to the death or incapacitation of the adviser. This task included ensuring that clients had access to their funds. The Securities Division encountered difficulty because the current business continuity plans were inaccessible or incomplete. Based on these experiences, the Securities Division determined it is essential as the regulator to have a copy of each adviser’s current business continuity plan in the event the Securities Division is called to assist with the succession plan for the protection of investors.

[2] In 2014, the Securities Division amended its recordkeeping rule at WAC 460-24A-200(1)(y) to require investment advisers to maintain a business continuity plan. In 2019, the Securities Division adopted a rule at WAC 460-24A- 126 that specifies the required content of the business continuity plan.

Thus, the purpose of the filing requirement is not to ensure that the business continuity plan exists, but for the Securities Division to have access to the information it contains. For this reason, an annual certification in lieu of filing the current business continuity plan would not fulfill the purpose of the rule. Similarly, a requirement that the business continuity plan be available upon examination or upon request will not suffice if a solo investment adviser is incapacitated. We do not believe that requiring investment advisers to create a separate document or form to file would reduce compliance burdens as compared to simply requiring the filing of an existing document. For these reasons, the Securities Division declines to adopt the commenters’ alternate filing proposals.

The Securities Division made no changes to the final rule in response to the comments. However, the Securities Division undertakes to ease compliance burdens in several ways. First, the Securities Division will include a reminder in its annual investment adviser renewal notice to submit the current business continuity plan pursuant to WAC 460-24A-205(1)(h) if the plan has been materially amended and not yet provided to the Division. To ease adviser concerns that their business continuity plans may not meet requirements, the Securities Division undertakes to provide sample business continuity plans for different types of investment adviser firms (such as fee-only advisers and private fund advisers) to model the information advisers should include in such plans. In addition, the Securities Division agrees to review any business continuity plan at the request of the adviser if that adviser has concerns about whether the plan meets the requirements of WAC 460-24A-126. Advisers may contact the Securities Division if they have questions regarding whether an amendment to a business continuity plan is material and therefore would necessitate filing under WAC 460-24A-205(1)(h). The Securities Division confirms that material changes would include a change in the successor contact person or such person’s contact information, a change in custodian(s), or a change in the location of business records.

Recordkeeping Regarding Due Diligence of Third-Party Vendors

The Securities Division proposed to add a requirement to the recordkeeping rule at WAC 460-24A-200(1)(ff) to require advisers to document due diligence regarding the ability of their third-party vendors to perform the activities and functions outsourced to them by the adviser. The Securities Division received one comment on this proposal. The commenter noted that the rule did not define the scope of the due diligence for different types of third-party vendors. The commenter recommended that the Securities Division confirm that due diligence for the purpose of the rule may be “risk-based and proportionate to a vendor’s access to client assets, confidential information, or essential information, and that advisers may rely, where reasonable, on vendor contracts, SOC reports, cybersecurity attestations, insurance certificates, or other appropriate third-party materials rather than creating a bespoke due-diligence memorandum for every vendor relationship.”

The Securities Division made no changes to the final rule in response to the comment. The Securities Division confirms that nature of the adviser’s due diligence of third-party vendors will vary based on the nature of the services to be provided, and the vendor’s access to confidential information, client data, and client assets. The adviser must evaluate how the adviser will meet its recordkeeping requirements under WAC 460-24A-200, and requirements to protect sensitive information under WAC 460-24A-122 and WAC 460-24A-220(14), if the adviser hires any third-party vendors. For instance, advisers who use third-party cloud storage or artificial intelligence tools must evaluate how the vendor will protect or use client data. For the purposes of the new recordkeeping requirement at WAC 460-24A-200(1)(ff), the Securities Division expects advisers to document how they researched, evaluated, and selected third-party vendors. Advisers should identify and document the materials and representations relied upon in making their decisions.

Cybersecurity Policies and Procedures and Code of Ethics and Physical – WAC 460-24A-121 and WAC 460-24A-123

The Securities Division proposed to adopt a separate physical and cybersecurity policies and procedures rule at WAC 460-24A-121 and a separate code of ethics rule at WAC 460-24A-123 to specify the required contents of these policies in accordance with the NASAA Model Rule for Investment Adviser Written Policies and Procedures. 3

The Securities Division received one comment that requested the Securities Division “confirm that substance, rather than prescribed form, will govern the cybersecurity and code-of-ethics requirements.” The commenter expressed concern that advisers “may feel compelled to pay consultants to reorganize or rewrite effective existing policies merely to mirror the sequence, terminology, or heading of the model rules.” The commenter requested that the Securities Division “confirm that policies need not reproduce the rule verbatim, that advisers may incorporate by reference across their compliance manuals, that existing policies are acceptable when they substantively address the required risks, and that examination expectations will be scaled to the size, complexity, services, technology, and custody profile of the firm.”

Securities Division examiners have routinely referred advisers to the text of the NASAA Model Rule when asked about the requirements for the physical and cybersecurity policies and procedures. For this reason, we do not anticipate that most advisers will need to revise their policies. Additionally, WAC 460-24A-121(1) specifies that advisers must tailor their physical and cybersecurity policies to their specific businesses and risk profiles. Provided the policy meets the substantive requirements set forth in the rule, the Securities Division will not require policies to mirror the sequence or terminology of the rule. The Securities Division confirms that existing physical and cybersecurity policies are acceptable when they substantively address the required risks.

Regarding the new code of ethics specifications at WAC 460-24A-123, the Securities Division undertakes to ease compliance burdens by providing a sample code of ethics that meets the requirements of the final rule. Advisers may adopt and implement the sample code of ethics. This should alleviate concerns that advisers would feel compelled to hire a consultant to assist in the development of an appropriate code of ethics. We note that the code of ethics specifications in the Model Rule mirror SEC Rule 204A-1, which means there are available samples and public resources on which investment advisers may rely to craft their codes of ethics. The Securities

[3] The Securities Division has required registered investment advisers to maintain a code of ethics and physical and cybersecurity policies and procedures since 2019, by function of the recordkeeping requirements at WAC 460-24A- 200(1)(aa) and (bb), but has not previously specified the content of these policies.

Division confirms that it will not require the code of ethics to mirror the specific sequence or terminology of the rule provided that the code of ethics substantively complies with the rule.

Proxy Voting – WAC 460-24A-125

The Securities Division proposed minor updates to the proxy voting policies and procedures rule at WAC 460-24A-125 to conform to the language of the NASAA Model Rule for Investment Adviser Written Policies and Procedures. The updates included adding a requirement that the adviser annually must review the adequacy and effectiveness of the proxy voting policies and procedures, and adding a statement that an adviser without proxy voting authority must disclose this fact to its clients.

The Securities Division received one comment regarding the amendments. The commenter stated that the structure of the rule made it unclear whether the annual review of policies and procedures would be required of advisers without proxy voting authority. The commenter also noted that the requirement that advisers without voting authority disclose such to clients was oddly placed given introductory language that stated the provision applies to advisers with proxy voting authority.

The Securities Division agrees that WAC 460-24A-125 would benefit from restructuring to clarify its applicability. Accordingly, for clarity and consistency with the Section 3 of the NASAA Model Rule for Investment Adviser Written Policies and Procedures, the Securities Division revised the subsection numbering in WAC 460-24A-125. Previously, the rule had subsections (1) to (4). Now, the rule has subsections (1)(a) to (d), and (2). We also moved the sentence that was initially located in what is now subsection (1)(b) to a standalone subsection (2), and added minor clarifying language. The Securities Division believes this change clarifies that subsections (1)(a) to (d), including the requirement for the annual review of the proxy voting policies and procedures, apply only to registered investment advisers that vote client securities, whereas subsection (2) applies to registered investment advisers that do not vote client securities.

Client Suitability Information – WAC 460-24A-200(1)(r)

The Securities Division’s recordkeeping requirement at WAC 460-24A-200(1)(r) requires advisers to maintain written information about each advisory client that is the basis for making any recommendation or providing any investment advice to such client, including the items listed in the rule. The Securities Division proposed to revise WAC 460-24A-200(1)(r) to add that the adviser must keep a record of the client’s net worth, liquid net worth, and annual income.

The Securities Division received one comment regarding the amendment. The commenter asked the Securities Division to confirm that that “firms need not document figures that are not actually used as a basis for advice to a particular client.” The commenter also requested the Securities Division permit advisers to document ranges, client estimates, or a client’s declination to provide information.

The Securities Division made no changes to the final rule. The Securities Division believes most investment advisers currently request and document their clients’ net worth, liquid net worth, and income, as it would be difficult for an investment adviser to provide suitable investment advice absent this information. Therefore, we decline to confirm that advisers would not need to document this information. However, the Securities Division agrees that advisers may accept good faith estimates and ranges from the client, unless the investment adviser has reason to believe that the information provided is inaccurate. The Securities Division also agrees that advisers may document a client’s refusal to provide information in the form of a client attestation. However, we caution that advisers who cannot obtain and document their client’s net worth, liquid net worth, and income must consider whether the adviser can provide investment advice to such persons without violating the adviser’s fiduciary duty or the suitability requirements in RCW 21.20.702 and WAC 460-24A-220(1).

Fee Invoices – WAC 460-24A-135

The Securities Division proposed to amend WAC 460-24A-135(1) to add that the fee invoices for advisers who do not directly deduct fees must include a statement describing the services provided to the client during the billing period. This revision aligns with the existing recordkeeping rule at WAC 460-24A-200(1)(cc), which requires advisers to retain “a copy of the written advisory fee billing information provided clients in accordance with WAC 460-24A-135, and a written record of the services provided to each client during the billing period.”

The Securities Division received one comment on the amendment. The commenter stated that for an ongoing advisory relationship, including a description of the services provided would involve generating repetitive boilerplate language each billing cycle and could misleadingly imply that the advisory fee relates only to discrete tasks completed in the billing period. The commenter recommended “allowing advisers to identify the ongoing advisory services provided under the agreement, with reference to the agreement or brochure for a fuller description.”

The Securities Division made no changes in response to the comment. The Securities Division confirms that fee invoices under WAC 460-24A-135 must include a description of the services provided with enough specificity for the recipient of the bill to understand which services the bill covers. Inevitability, the description may be repeated in subsequent periods if the services provided are the same in each period. References to the services provided under the advisory agreement may be appropriate provided a reasonable person would understand to which specific services the bill refers.

Regarding compliance with WAC 460-24A-135, the Securities Division does not require investment advisers who are third-party solicitors to provide a fee invoice to a client for the portion of the client’s advisory fee that they receive from the client’s investment adviser.

General Compliance Burden and Washington-Specific Books and Records

The Securities Division received two comments critical of the aggregate compliance burden of the rule amendments.

One commenter expressed concern with “the cumulative cost and administrative impact on small advisory firms, particularly firms headquartered outside Washington and registered in several states.” This commenter opined that the amended rules may “create substantial new documentation obligations” and mentioned books and records requirements related to vendor due diligence, fee invoices, advertisements, cybersecurity policies, and other operational matters. This commenter encouraged the Securities Division to accept existing compliance records and third-party documentation rather than requiring firms to create separate Washington-specific records.

Another commenter requested the Securities Division continue its August 26 rulemaking hearing or schedule a second rulemaking hearing to allow firms additional time “to explain, in practical terms, how the proposed requirements would operate cumulatively in a small advisory business, to quantify the hours and outside costs, involved, and to respond to any changes the Division may make after reviewing the current round of comments.”

As discussed earlier in this Concise Explanatory Statement, the Securities Division made certain changes to the rules in response to comments regarding costs and compliance burdens. For instance, the Securities Division revised the compliance date for the errors and omissions insurance requirement to extend it from January 1, 2027 to January 1, 2028. The Securities Division also made undertakings and offered other solutions to reduce compliance burdens as discussed herein.

To address concerns regarding the applicability of recordkeeping rules to advisers located outside of Washington or registered in many states, we note that WAC 460-24A-200(10) states that investment advisers registered in Washington but having their principal place of business outside of Washington are exempt from the requirements of WAC 460-24A-200, provided that the adviser is registered in the state where its principal place of business is located and is in compliance with that state’s recordkeeping requirements.

The Securities Division held its rulemaking hearing on August 26, 2026 as published in the Form CR-102. The rulemaking hearing complied with the notice and timing requirements under RCW 34.05. The Securities Division declines to hold a second rulemaking hearing or to request a second round of comments because it is not required under RCW 34.05. Moreover, the Securities Division previously distributed a preliminary draft of rule amendments and conducted an economic impact survey to determine the costs associated with the draft rule amendments. The Securities Division revised the draft rules to reduce costs and compliance burdens in response to the feedback received, as detailed in the small business economic impact statement published in the Form CR-102. Effectively, the Securities Division conducted two rounds of comments regarding the rule amendments, which included specific requests for feedback regarding the anticipated economic impact.

II. Oral Comments.

The Securities Division held a public hearing on the proposed rule amendments at 11:00 a.m. on August 26, 2026 at the Department of Financial Institutions office at 150 Israel Rd. SW, Tumwater, WA 98501. The hearing had a virtual attendance option via Microsoft Teams.

Seven members of the public attended the hearing (one in person, and six virtually). In addition, nine staff members from the Department of Financial Institutions attended and a court reporter from Capital Pacific Reporting was present. A transcript of the hearing is available upon request.

David Neuman of Israels and Neuman PLC testified at the hearing in support of the proposed rule at WAC 460-24A-051 to require investment advisers to maintain errors and omissions insurance. However, he suggested that the coverage amount should be higher. He suggested that the level of errors and omission insurance should depend on the amount of the adviser’s assets under management, with $1 million coverage being the absolute minimum for smaller investment advisors. He stated that investors harmed by investment advisers have been unable to recover damages due to the adviser’s inadequate insurance coverage. He stated that his research indicated that costs of errors and omissions insurance for investment advisers to be between $1,000 to $3,000 annually, and noted that there are other jobs in Washington that require insurance coverage. He noted that qualified custodians often require investment advisers to maintain errors and omissions insurance. He also testified in support of the proposed amendments to WAC 460-24A-220 that would make it an unethical practice for an investment adviser or investment adviser representative to fail to pay an arbitration award.

The Securities Division’s response to David Neuman’s testimony is discussed in the errors and omissions insurance section earlier in this Concise Explanatory Statement. The other members of the public who attended the hearing declined to provide testimony. No persons submitted written materials at the hearing.

CONCLUSION

The final rules are the product of an open and deliberative process with stakeholder input. Throughout the rulemaking process, the Securities Division has involved its registered investment advisers, exempt reporting advisers, and notice-filed federal covered advisers, as well as interested members of the public.

The Securities Division filed a Form CR-101: Pre-Proposal Statement of Inquiry with the Code Reviser’s Office on April 14, 2025 indicating that the Securities Division was considering amending the rules in Chapter 460-24A WAC. The Securities Division posted the Form CR-102 on its website, and electronically mailed the Form CR-101 to all its registered investment advisers, exempt reporting advisers, and notice-filed federal covered advisers, and to the Securities Division’s rulemaking interested persons list. The Securities Division received five comment letters on the Form CR-101, and incorporated the suggestions into the preparation of an initial draft of amendments to Chapter 460-24A WAC.

On February 27, 2026, the Securities Division posted an initial draft of rule amendments on its website. In addition, the Securities Division conducted an electronic survey to determine the costs associated with the draft rule amendments. The Securities Division emailed the survey to all investment advisers registered in Washington, all exempt reporting advisers filed in Washington, and all notice-filed federal covered advisers with a principal place of business in Washington. The survey period remained open until March 20, 2026. Following the completion of the survey, the Securities Division revised the draft rules in response to feedback received in the survey.

On July 15, 2026, the Securities Division filed a Form CR-102: Proposed Rule Making with the Code Reviser’s Office to propose amendments to Chapter 460-24A WAC. The Securities Division emailed the Form CR-102 to all its registered investment advisers, exempt reporting advisers, and notice-filed federal covered advisers, and to the Securities Division’s rulemaking interested persons list, and posted the CR-102 on its website. The Securities Division accepted written comments until August 25, 2026. The Securities Division held a public hearing on August 26, 2026 at the Department of Financial Institutions office to accept oral testimony. The Securities Division also offered a virtual attendance option via Microsoft Teams. The Securities Division took the eight written comments received under the Form CR-102 and the oral testimony received at the hearing under consideration in the adoption of the final rules, as described in this Concise Explanatory Statement.