Yesterday, the Division of Investment Management of the U.S. Securities and Exchange Commission (“SEC”) updated its Staff Responses to Questions About the Custody Rule. In the updated responses, the Division provided guidance for co-trustee arrangements. As a result of the new guidance, we have revised our Investment Adviser Compliance Alert published yesterday. For an updated version, please click here.
For your easy reference, the following are the specific changes that have been made to pages 3 and 4 of this Investment Adviser Compliance Alert:SEC Adopts to Custody Rule under Investment Advisers Act of 1940:
Serving as Trustee is Deemed to be Custody
If an investment adviser or its related persons serve as trustee, executor to an estate or conservator, that will cause the investment adviser to have custody. If a supervised person has any capacity that gives the supervised person legal ownership of, or access to, the client funds, then the investment adviser is deemed to have custody. The current rule provides no exception for the investment adviser or its related persons acting as a co-trustee. However, on March 10, 2010, the SEC’s Division of Investment Management provided the following guidance regarding co-trustee arrangements.
Q: In some trusts, co-trustees are required either by law or the trust instrument in order to protect the trust beneficiaries from the actions of a single trustee acting alone. In these situations, no co-trustee is able to withdraw assets without the prior written consent of the other co-trustee(s). Would an adviser acting as trustee in this type of arrangement have custody of the trust’s assets for purposes of the rule?
A: The Division would not consider an adviser to have custody in such circumstances, provided that (i) the trust has a co-trustee that is a bank or a trust company that meets the definition of a qualified custodian under rule 206(4)-2(d)(6) and is not a related person of the adviser, (ii) the qualified custodian delivers account statements directly to each co-trustee that is not itself the custodian, and (iii) under the trust instrument or by law the withdrawal of any assets of the trust by the adviser requires the prior written consent of all of its co-trustee(s). (Posted March 10, 2010.)
Q: For estate planning and other purposes, some people form revocable grantor trusts. With these trusts, the person who establishes and funds the trusts (the grantor) may revoke or modify the trust at will, including changing beneficiaries. If an adviser is co-trustee along with the grantor, would the adviser have custody of the trust’s assets for purposes of the rule?
A: The Division would not consider an adviser to have custody under rule 206(4)-2 in such circumstances if (i) the adviser is prohibited by the trust instrument or by law from withdrawing any assets from the trust without the prior written consent of all of its co-trustees, (ii) each grantor who has contributed assets to the trust acts as co-trustee, and (iii) the qualified custodian delivers account statements directly to each co-trustee. (Posted March 10, 2010.)
Posted by Bryan Hill