Category Archives: Custody
 

Inadvertent Custody – SEC Guidance Update

March 07, 2017

In February 2017,  the Division of Investment Management of the U.S. Securities and Exchange Commission (“SEC”) issued a Guidance Update “Inadvertent Custody: Advisory Contract Versus Custodial Contract Authority.” In this Guidance Update, the SEC explained that an investment adviser may have custody of client funds or securities because of provisions in a custodial agreement entered into by the investment advisory client and a qualified custodian.

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Fee Deduction = Custody for Registered Investment Advisers

August 13, 2013

Under Rule 206(4)-2 of the Investment Advisers Act of 1940 (“Investment Advisers Act”),  custody means “holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them.” An investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) will be deemed to have custody of a client’s assets if it meets this definition or if a related person of the investment adviser holds, directly or indirectly, client funds or securities, or has any authority to obtain possession of them, in connection with advisory services the investment adviser provides to clients.  Examples of custody include: “possession of client funds or securities (but not of checks drawn by clients and made payable to third parties) unless you receive them inadvertently and you return them to the sender promptly but in any case within three business days of receiving them; any arrangement (including a general power of attorney) under which [the investment adviser] is authorized or permitted to withdraw client funds or securities maintained with a custodian upon [the investment adviser’s] instruction to the custodian; and any capacity (such as general partner of a limited partnership, managing member of a limited liability company or comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives [the investment adviser] or [its] supervised persons legal ownership of or access to client funds or securities.”

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Understanding Activities not Commonly Recognized as Custody

August 06, 2013

On March 4, 2013, the U.S. Securities and Exchange Commission (“SEC”), by the Office of Compliance Inspections and Examinations issued a risk alert that discusses deficiencies involving investment advisers and custody. As stated in the risk alert, “One of the most critical rules under the Investment Advisers Act of 1940 is the custody rule, which is designed to protect advisory clients from the misuse or misappropriation of their funds and securities. Yet, the SEC’s National Examination Program (“NEP”) has observed widespread and varied non-compliance with elements of the custody rule.”

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Risk Alert Issued by SEC Identifies Significant Deficiencies Involving Failure of Investment Advisers to Comply with the Custody Rule

March 19, 2013

In a Risk Alert issued March 4, 2013 by the U.S. Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”), it was revealed that “the SEC’s National Examination Program (“NEP”) has observed widespread and varied non-compliance with elements of the custody rule.” Rule 206(4)-2 under the Investment Advisers Act of 1940 (“Investment Advisers Act”), states that an investment adviser has custody of client assets if it or its related person holds, directly or indirectly, client funds or securities or has any authority to obtain possession of them.  The Risk Alert indicated that approximately one-third (over 140) of the recent examinations reviewed by the SEC’s National Examination Program staff included custody related issues. The Risk Alert was issued by the SEC’s Office of Compliance Inspections and Examinations to encourage registered investment advisers to review their policies and procedures and examine their practices related to the deficiencies noted in the Risk Alert to ensure that investment advisers are aware of “…their responsibilities under the custody rule to protect client assets.”

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Washington Department of Financial Institutions Updating Investment Advisor Rules

October 10, 2012

The State of Washington’s Department of Financial Institutions recently sent out a memo to investment advisors registered in Washington that described potential updates, amendments, and additions to Washington’s investment advisor rules and regulations.  Amendments to the custody requirements and an exemption for private fund advisors are the major provisions included in the memo, but the Washington Department of Financial Institutions also proposed changes for financial reporting, books and records, unethical practices, proxy voting, advisory contracts, and compliance procedures.  You can access a copy of the draft amendments here.

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SEC Update FAQs of New Custody Rule

June 03, 2010

The Division of Investment Management of U.S. Securities and Exchange Commission (“SEC”) recently updated “Staff Responses to Questions About the Custody Rule.”  (For a link to Staff Responses click here).  In the updated responses, the Division provided new guidance concerning a variety of issues related to the custody rule. Two important issues discussed by the SEC clarify an investment adviser’s ability to request checks from a client account and situations where an investment adviser has online access to client pension accounts through the client’s ID number and password.

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Registered Investment Adviser to Celebrities Charged in Custody Fraud Case

June 03, 2010

Kenneth Starr, an investment adviser representative, to several celebrities and other wealthy clients, was arrested on May 27th for allegedly using client funds for his own personal use.  Starr has been charged in a New York District Court with fraud by an investment advisor, a wire fraud scheme to obtain property, money laundering, false statements in an IRS Filing, and false statements to a federal officer, for fraudulently misappropriating over $30 million of client funds. The Complaint also charges Andrew Stein, an associate of Starr’s, with various tax fraud violations.  (Click here for the full Complaint). 

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Many Investment Advisers Are Not Prepared for SEC’s New Custody Rule

March 29, 2010

Although the recent changes by the U.S. Securities and Exchange Commission (“SEC”) to the custody rule for federally registered investment advisers went into effect on March 12, 2010, it appears that many investment advisers mistakenly assume they don’t have custody, misinterpret the definition of custody or believe they are somehow exempt from the custody rule requirements.

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