Premised on a belief that advisory clients need more protection under the Investment Advisers Act of 1940 (the Advisers Act) when a registered investment adviser (RIA) has custody of client funds or securities, the Securities and Exchange Commission (SEC) issued a final rule on December 30, 2009, adopting amendments to Rule 206(4)-2, the custody rule, and certain related provisions of Rule 204-2, Form ADV and Form ADV-E. Except as otherwise discussed below, RIAs must comply with the amendments effective March 12, 2010.
Rule 206(4)-2, as amended, defines custody to mean “holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them. You have custody if a related person holds, directly or indirectly, client funds or securities, or has any authority to obtain possession of them, in connection with advisory services you provide to clients. Custody includes the following:
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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 |
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Any arrangement (including a general power of attorney) under which you are authorized or permitted to withdraw client funds or securities maintained with a custodian upon your instruction to the custodian |
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Any capacity (such as general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives you or your supervised person legal ownership of or access to client funds or securities |
The amendments are contained in SEC Release IA-2968, and can be found at the following link: http://www.sec.gov/rules/final/2009/ia-2968.pdf. The SEC has also issued its first responses to frequently asked questions about the amended custody rules. The FAQs are dated March 10, 2010, and can be found at the following link: http://www.sec.gov/divisions/investment/ custody_faq_030510.htm.
To read highlights of the amendments affecting RIAs with custody of their clients’ funds and securities, please click [here].
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