In a speech today, Mary L. Schapiro, Chairman of the U.S. Securities and Exchange Commission (“SEC”), announced that in response to the recent investment scams, the SEC will consider, in short order, a new proposal for strengthening the controls over investment advisers with custody of client funds and securities.
Category Archives: Custody
Earlier this month, the California Department of Corporations announced proposed changes to rules regulating investment advisers registered in California. According to the release, the objective in proposing the amendments is to increase uniformity with the model rules suggested by the North American Securities Administrators Association (NASAA), rules already in effect in other states, and rules established by the Securities and Exchange Commission (SEC). California is giving the public an opportunity to comment on the proposed changes. The time period for comment ends on October 30, 2007.
Attention Investment Advisers Registered in Illinois
August 30, 2007
Recently the Illinois Securities Department has been requesting investment advisors registered with their office provide additional information regarding disclosures made in the firm’s Form ADV. Requests for additional information have been made not only during the initial registration process but also in response to updates submitted by registered investment advisors with active registration. Additional information required has included more thorough descriptions of the services and fee arrangements offered by firms, copies of agreements entered into with third-party investment advisors, copies of privacy policy notices, and copies of Schedule H brochures used by the firm even when the wrap-fee program is sponsored by another firm. Firms registered in Illinois should be prepared to provide the additional information and documentation promptly to the Department when requested. We support the Department’s decision to ensure firms are fully disclosing all pertinent information and can substantiate compliance with investment advisory rules and regulations.
Implications of Deducting Advisory Fees for Nebraska Registered Advisors
February 26, 2007
The issue of custody over client funds and securities seems to be one of the most variant issues among regulators. One common form of custody is an advisor’s authorization to have fees deducted directly from client accounts. While the SEC and most states consider this practice a custody situation, the procedures advisor firms must implement vary from regulator to regulator. Therefore it is important for all investment advisors to fully understand and comply with the custody requirements that apply to their firm.
Kansas Securities Regulator Suspends IA Firm
November 28, 2006
Earlier this fall, the Office of the Kansas Securities Commissioner entered an order to summarily suspend the investment advisor registration of a state firm located in Overland Park, Kansas. According to the Commissioner’s Press Release, the “firm committed fraud by informing a client that his funds were maintained in an account at a brokerage firm when, in fact, the funds were pooled with the funds of other investors in a second account controlled” by the advisor firm’s president. The firm also apparently did not fully cooperate with the state examiners during their investigation. This enforcement action serves as example as to how Kansas securities regulator will respond when an investment advisor attempts to circumvent state securities laws.
Custody Interpretations Can Be Confusing
February 08, 2006
According to a letter from the State of Washington dated January 3, 2006, Washington regulators now deem investment advisors to have custody when they have the ability to directly withdraw fees from client accounts. This is the case even when the advisor firm attains the client’s authorization, provides a fee notice to the client, and ensures the fee disbursement is disclosed on the client’s account statement. Therefore, state registered advisor firms that engage in this practice and are located in Washington must answer affirmatively to ADV Part 1A, Item 9 (Custody). However, the State of Washington also explained that if the firm is deemed to have custody for this reason alone, the firm does not need to meet the minimum net worth requirements for firms with custody or attain audited financial records. This is the case so long as the firm receives client authorization to debit advisory fees directly from the client account, provides a fee deduction notice to clients, and ensures the fee disbursement is disclosed on the client’s account statement.
Custody Requirements for Advisors to Hedge Funds
September 06, 2005
If you are an advisor to a private fund (i.e. hedge fund or pooled investment vehicle) do you know if you are deemed to have custody? If so, is your Form ADV Part I completed correctly?
