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October 01, 2010 at 08:00 PM
Sweeping amendments to the Securities and Exchange Commission’s custody rule 206(4)-2 became effective March 12, 2010, and will substantively impact significantly more advisors than imagined who do not have “physical” custody of client assets. If you have “custody” (see examples below) subsequent to March 12, 2010, you are deemed to have it for 2010 and are required to comply with the amended rule regardless of whether or not you ceased such practices prior to December 31, 2010.
In addition, those having custody will be required to reflect that fact on the recently amended Form ADV format (which will be the topic of November’s column). The amended rule requires an advisor to engage an independent CPA to commence an initial annual surprise examination no later than December 31, 2010, and for that CPA to then file the corresponding initial Form ADV-E no later than April 30, 2011. However, if the CPA starts the surprise exam prior to December 31, 2010, the exam must be completed and the ADV-E filing made no later than 120 days thereafter.
Unfortunately, many issues pertaining to the amended rule continue to remain unclear and subject to interpretation.
All the instances below would require an advisor to engage an independent auditor and file Form ADV-E.
Ability to Sign Checks or Withdraw Funds. The authority to sign checks on a client’s behalf, to withdraw funds or securities from a client’s account (except for the debiting of its advisory fee, so long as the assets are held by a qualified custodian that sends a periodic statement at least quarterly and directly to the client), or to dispose of client funds for any purpose other than authorized trading.
Possession of Bank Account or Credit Card Information. The possession of client bank account or credit card information for the purpose of the advisor debiting/charging said accounts to pay the advisor’s fee.
