April 14, 2009
If an advisor is able to place trades, but not change the address of record or transfer assets to an account with a non-matching registration, the SEC considers this discretionary and not custody.
If an advisor takes possession of the login credentials to a client’s account website, the SEC may consider it as having custody:
Look at the custodial websites to see whether they offer the ability to change the address of record. If so, then the advisor has custody with physical possession for those accounts and would have to meet all of the requirements discussed below.
An advisor has custody when it can control client funds or securities for purposes other than authorized trading. So, if the advisor has access to the custodian’s website and the ability to make changes in the address of record in the client account, it has custody. If the advisor does not have access to the custodian’s website, or has access but not the ability to make changes to the client’s address of record, it does not have custody.
Requirements of custody
If your firm has custody of accounts, you must meet certain SEC requirements:
- Design and implement a set of controls to protect client assets from being lost, misused, misappropriated, or available to the advisor’s creditors.
- Accounts must be maintained at a “qualified” custodian held in client's name. Qualified Custodians are banks and savings associations, registered broker-dealers, registered futures commissions merchants, and foreign financial institutions.
- Advisors must have a reasonable belief that the qualified custodian is providing statements, at least quarterly, directly to their clients. Direct delivery from the custodian is designed to ensure the integrity of the information and permit clients to identify any erroneous or unauthorized transactions.
- A general partner in a limited partnership does not have to comply with these reporting requirements if
- The partnership is audited annually; and
- The audited statements are distributed to all partners within 120 days after fiscal year end.
- Advisors must disclose on Form ADV if they have custody only because they can direct-debit fees, in which case they are allowed to mark “no” on Item 9 in Form ADV Part 1.
- The SEC may select a sample of clients and have the advisor ask the custodian to send those statements for those accounts, as of a specific date, directly to the SEC office.
- If the custodian is affiliated with the advisor, the SEC may send requests directly to clients to confirm the assets reported to clients by the advisor are the same as those reported to the SEC.
Advisors using a custodian that does not provide quarterly statements to their clients or has the ability to obtain physical possession of client assets must meet the following additional requirements:
- The advisors must provide quarterly statements to the client; and
- The advisors must undergo an annual surprise audit by an independent accounting firm, which would report the results of the surprise audit to the SEC on Form ADV-E.
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