Illinois is also providing guidance regarding its interpretation and rules concerning custody. The Department interrupts an investment adviser to have custody of client accounts when question 2.I.(1) of Form ADV Part 1B (deduction of fees directly from client accounts) is checked ‘yes’ even if it is indirect custody, meaning the client has given permission for a third-party investment advisor to deduct fees from the client’s account. When fees are deducted from client accounts, the registered investment advisor will need to also mark Item 9.A and B of Form ADV Part 1A. As long as the firm is marking and complying with Form ADV Part 1B, Items 2.I(1) a, b, and c, the firm does not need to comply with the additional financial requirements, i.e. audited balance sheet and additional net worth and/or bonding. However, firms that deduct advisory fees but do not comply with Items 2.I.(1) a, b, and c (i.e. send invoices to clients, receive client authorization, and ensure the fee deduction is listed on the client’s account statements) will need to comply with the additional financial requirements.
If your firm is registered with the state of Illinois and has questions concerning these requirements, please give us a call.