Series 66

By Investopedia AAA

Handling Client Funds - Introduction

Custody
Custody is defined as having physical possession of funds or securities. Funds and securities can be placed in custodian accounts, though an Administrator may require that an advisor post a bond for such.


Investment advisors that have the ability to withdraw money from a client's account are considered to have custody of these funds. In that case, the Investment Advisers Act of 1940 requires the IA to do the following:

  • Keep each client's securities segregated and held in safekeeping
  • Not commingle client funds with the IA's funds
  • Maintain client funds in accounts that name the IA as trustee or agent
  • Keep records showing deposits and withdrawals for each client account
  • Notify clients in writing of how the funds are maintained and when accounts are changed
  • Send a quarterly (or more frequent) itemized statement to each client
  • Arrange an annual unannounced visit from an independent public accountant, who must then file a report with the SEC verifying the amount of client funds and securities

These rules do not apply if the IA is also a broker-dealer, since broker-dealers are subject to similar rules at the federal level.

Under the USA, IAs must notify the Administrator if they currently have custody of client funds and securities (or plan to in the future). Otherwise, the custody requirements are the same as those stated by the Investment Advisors Act of 1940 (except that the state Administrator receives the annual accountant report, rather than the SEC).

Discretion

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