Form ADV Part 1 Custody Changes

November 15, 2010

As part of CRD/IARD Software Release 2010.4 (click here to access the release), the United States Securities and Exchange Commission (“SEC”) announced changes to the custody questions listed on Form ADV Part 1.  Specifically, the following changes have been made to Item 9 of Form ADV Part 1:

  • SEC registered advisers must continue to indicate if the firm has custody at Items 9.A.(1) and (b), but may now mark “No” if “a related person maintains client funds or securities as a qualified custodian but [the adviser has] overcome the presumption that [it is] not operationally independent (pursuant to Advisers Act rule 206(4)(2)-(d)(5)) from the related person.”
  • Addition of Item 9.A.(2) to report the total dollar amount of client funds and securities as well as the total number of clients for which the adviser has custody.
  • Addition of Item 9.B.(2) to report the total dollar amount of client funds and securities as well as the total number of clients for which the adviser’s related persons have custody.
  • Addition of Item 9.C. for advisers to indicate whether a qualified custodian sends quarterly account statements and whether an independent public accountant conducts an annual audit, an annual surprise examination, or prepares an internal control report.  If the answer is in the affirmative with respect to any of the independent public accountant questions, the adviser is required to complete Section 9.C of Schedule D for each independent public accountant that fulfills those functions.
  • Addition of Item 9.D. to report whether the adviser or related persons of the adviser act as a qualified custodian for adviser’s clients.  If the adviser has a related person that acts as a qualified custodian, the adviser must fill out Section 9.D of Schedule D for each related person that acts as a qualified custodian for the adviser’s clients.
  • Addition of Item 9.E. to list the date of any surprise examinations conducted by an independent public accountant during the adviser’s previous fiscal year.

The SEC has modified Item 7.A.(1) so that now all related persons that are investment advisers, broker dealers, municipal securities dealers, or government securities broker or dealers mustbe listed on Section 7.A. of Schedule D.  The SEC commented that these changes will provide investors with additional safeguards and will provide “better information about the custodial practices of investment advisors.” 

Also, the CRD/IARD Software Release 2010.4 included an announcement that the increased disclosure period from two to ten years on FINRA BrokerCheck and on IAPD (Investment Adviser Public Disclosure) became effective November 6.  This means the general public will be able to view information for 10 years following the individual or firm’s departure from the industry.

Finally, accounting firms hired by investment advisers to conduct surprise verification examinations, in accordance with the custody rule, must now submit Form ADV-E and the accompanying accountant’s examination certificate online through IARD.  A Form ADV-E must also be submitted by the accounting firm within four days of its resignation or dismissal from, or other termination of, the engagement with the investment adviser, or removing itself or being removed from consideration from reappointment, Investment adviser firms will receive notification via email when an accountant submits a surprise examination report via Form ADV-E.

Posted by Bryan Hill
Labels: Custody, Form ADV, IAR Licensing, IARD