Section 4425.10  Purpose

 

The purpose of this Part is to provide verification that dealers maintaining custody and possession of, or control over, the securities of a pension fund are in compliance with the requirements of Section 1-113.7 of the Illinois Pension Code [40 ILCS 5/1-113.7] (see P.A. 90-507, effective August 22, 1997), and this Part.  Verification shall take the form of a notarized affidavit provided to the pension fund on an annual basis pursuant to Section 4425.40 of this Part.

 

Section 4425.20  Applicability

 

This Part shall apply to all pension funds established under Article 3 or 4 of the Illinois Pension Code [40 ILCS 5/3-101 through 3-152 and 4-01 through 4-144].

 

Section 4425.30  Definitions

 

            Accountant means an independent certified public accountant or accounting firm who is in good standing with the American Institute of CPAs and all states in which the accountant is licensed to practice.

 

            Dealer means a person, other than a natural person, required to be registered as a broker or dealer with the Securities and Exchange Commission pursuant to Section 15(a) of the Securities Exchange Act of 1934 (15 USC 780(a)).

 

            Financial Operations Principal shall mean a person associated with a dealer whose duties include:

 

            final approval and responsibility for the accuracy of financial reports submitted to any duly established securities industry regulatory body;

 

            final preparation of such reports;

 

            supervision of individuals who assist in the preparation of such reports;

 

            supervision of and responsibility for individuals who are involved in the actual maintenance of the member's books and records from which such reports are derived;

 

            supervision and/or performance of the dealer's responsibilities under all financial responsibility rules promulgated pursuant to the provisions of the Securities Exchange Act;

 

            overall supervision of and responsibility for the individuals who are involved in the administration and maintenance of the dealer's custody, control and processing of securities; or

 

            any other matter involving the financial and operational management of the member.

 

            Pension Fund means all pension funds established under Article 3 or 4 of the Illinois Pension Code [40 ILCS 5/3-101 through 3-152 and 4-101 through 4-144].

 

Section 4425.40  Notarized Affidavit

 

When a pension fund has entered into a custodial arrangement with a dealer, for the safekeeping of the pension fund's securities investments, on or before the dealer takes possession of or control of the securities, the pension fund shall obtain from the dealer a notarized affidavit, signed by a financial operations principal of the dealer.  So long as such custodial arrangement is maintained, the dealer shall continue to provide the pension fund with a notarized affidavit by April 30th for each succeeding year.  The notarized affidavit shall include, but not be limited to the following:

 

a)         A statement that the dealer is a registered broker-dealer with the U.S. Securities and Exchange Commission and is a member in good standing with the National Association of Securities Dealers; and

 

1)         With respect to securities that are not issued only in book-entry form:

 

A)        All such securities of each pension fund are either held in safekeeping in a place reasonably free from risk of destruction or held in custody by a securities depository that is a "clearing agency" registered with the U.S. Securities and Exchange Commission;

 

B)        The dealer is a member in good standing with the Securities Investor Protection Corporation;

 

C)        The dealer will send to each pension fund, no less frequently than each calendar quarter, an itemized statement showing the moneys and securities in the custody or possession of the dealer at the end of such period; and

 

D)        An independent certified public accountant conducts an audit of the dealer, no less frequently than once each calendar year, that reviews the dealer's internal accounting controls and procedures for safeguarding securities; and

 

2)         With respect to securities that are issued in book-entry form:

 

A)        All such securities of each fund are held either in a securities depository that is a "clearing agency" registered with the U.S. Securities Exchange Commission or in a bank that is a member of the Federal Reserve System;

 

B)        The dealer records the ownership interest of the funds in such securities on the broker-dealer's books and records;

 

C)        The dealer is a member in good standing with the Securities Investor Protection Corporation;

 

D)        The dealer will send to each pension fund, no less frequently than each calendar quarter, an itemized statement showing the moneys and securities in the custody or possession of the dealer at the end of such period; and

 

E)        The dealer's balance sheet containing a statement of its required net capital computed in accordance with Rule 15c3-1 (17 CFR 240.15c3-1), under the Securities Exchange Act of 1934, is audited annually by an independent certified public accountant, and the dealer's most recent audited balance sheet is furnished to each pension fund.

 

b)         Representations that the dealer is:

 

1)         Not authorized to act as an investment adviser for the pension fund; and

 

2)         Not a natural person; and

 

3)         In compliance with the provisions of Rule 15c3-3 (17 CFR 240.15c3-3) under the Securities Exchange Act of 1934.

 

c)         A certified copy of the dealer's most recent audited balance sheet, including the required net capital computation.

 

Section 4425.50  Pension Funds Bookkeeping and Records Requirement

 

Each pension fund engaged in a custodial arrangement with a dealer shall maintain a copy of the affidavit required by Section 4425.40 of this Part as a part of the pension fund's books and records.

 

Section 4425.60  Penalties

 

If a pension fund fails to meet the requirements of this Part, such pension fund shall be subject to the penalty provisions set forth in 50 Ill. Adm. Code 4435.