Custody Interpretations Can Be Confusing

February 08, 2006

According to a letter from the State of Washington dated January 3, 2006, Washington regulators now deem investment advisors to have custody when they have the ability to directly withdraw fees from client accounts. This is the case even when the advisor firm attains the client’s authorization, provides a fee notice to the client, and ensures the fee disbursement is disclosed on the client’s account statement. Therefore, state registered advisor firms that engage in this practice and are located in Washington must answer affirmatively to ADV Part 1A, Item 9 (Custody). However, the State of Washington also explained that if the firm is deemed to have custody for this reason alone, the firm does not need to meet the minimum net worth requirements for firms with custody or attain audited financial records. This is the case so long as the firm receives client authorization to debit advisory fees directly from the client account, provides a fee deduction notice to clients, and ensures the fee disbursement is disclosed on the client’s account statement.

This is an example of the inconsistency in the way that “custody” is interpreted between regulators. For example, the SEC has determined that deducting investment advisory fees directly from client accounts is also a form of custody; however, it alone does not require the investment advisor firm to mark ADV Part 1A, Item 9 in the affirmative.

Do you have a full understanding of your regulator’s approach to defining custody? If you have any questions on what is custody and what additional rules must be followed if your firm is deemed to have custody, please give us a call.

Posted by Bryan Hill
Labels: Custody