A summary of responses from the SEC Division of Investment Management
The SEC Division of Investment Management prepared responses to questions received about the Custody Rule. The information below summarizes some of the frequently asked questions (FAQs) most seen in practice:
- If an adviser inadvertently receives securities from a client, may the adviser forward the securities to the qualified custodian instead of returning the securities to the client?
Answer: If the adviser does not return the securities to the sender within three business days, the adviser has custody and has violated the requirement that the client’s securities be maintained in an account with a qualified custodian.
- If an employee of an advisory firm serves as a trustee to a firm client, does the firm have custody?
Answer: Generally, yes.
- If an advisor manages client assets that are not funds or securities, does the Custody Rule apply?
Answer: No, the Rule only applies to clients’ funds and securities.
- Does an adviser have custody if it has authority to transfer client funds or securities between two or more of a client’s accounts maintained with the same qualified custodian or different qualified custodians?
Answer: Generally, no.
- Can an adviser voluntarily send its own quarterly account statements to clients in addition to the statements that the clients receive directly from qualified custodians?
- When an RIA becomes subject to the surprise examination requirement for the first time, what period should the independent public accountant’s exam opinion cover?
Answer: A period beginning no later than the date the RIA became subject to the surprise examination requirement through the examination date.
- How does an RIA to a PIV comply with the Custody Rule if it does not use the Audit Provision Exception?
Answer: If the financial statements of the PIV are not audited and distributed as described above, the exceptions are not available. The RIA, among other things, must have a reasonable basis for believing that the qualified custodian sends quarterly account statements to each investor in the pool and must obtain an annual surprise examination with respect to the pool’s assets. The advisor must maintain privately offered securities owned by the pool with a qualified custodian.
- To use the Audit Provision Exception, must the financial statements be prepared in accordance with U.S. GAAP?
Answer: Yes, and the audit must meet U.S. GAAS requirements.
- Does a fund of funds have to meet the 120-day deadline for sending out its audited financial statements?
Answer: The Division has issued a letter that it would not recommend enforcement action to the SEC if an adviser relying on the Audit Provision Exception for a fund of funds distributes the audited financial statements to investors within 180 days from the end of the fund of funds’ fiscal year. A fund of funds is a PIV that invests 10% or more of its total assets in other PIVs that are not, and are not advised by, a related person of the pool, its GP, or its adviser. A “related person” of an adviser includes officers, partners, directors, most employees, and anyone controlled by, controlling, or under common control with the adviser.
Learn more about the accounting and reporting impact of the SEC Custody Rule in our article below. Contact your Keiter Opportunity Advisor with any questions specific to your business or email | call 804.747.0000.
For additional information, please access the following resources:
- SEC Small Entity Compliance Guide – Custody of Funds or Securities of Clients by Investment Advisers
- AICPA Investment Companies Expert Panel FAQs Regarding the SEC’s Revised Custody Rule and Guidance for Accountants
- Division of Investment Management Staff No-Action and Interpretive Letters
- SEC Guidance Update – Inadvertent Custody: Advisory Contract versus Custodial Contract Authority
- SEC No-Action Letter: Clarifying the Definition of Custody
- Potential Changes Coming to the SEC’s Custody Rules in 2023
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.