The Securities and Exchange Commission has issued another frequently-asked-questions guidance on the custody rule, with the agency’s Investment Management division seeking to clarify, among other issues, previous guidance on inadvertent custody.
New to this custody rule FAQ – which Cipperman Compliance Services argues has been updated by the SEC dozens of times – are FAQs regarding the “Definition of Custody; Scope of the Rule” section: Question II.11, and Question II.12.
As Cipperman, an independent firm offering regulatory compliance services, explains, the updated FAQ clarifies that an advisor that recommends a third-party custodian will be deemed to have custody of client assets where the custodial agreement allows the advisor to instruct the custodian to disburse or transfer funds or securities, even if the advisor does not know the contents of the custody agreement.
“However, if the advisor did not recommend, request or require the third-party custodian, the advisor will not have inadvertent custody that will require meeting the several elements of the custody rule (206(4)-2), including the surprise examination, notwithstanding the terms of the custody agreement,” Cipperman said.
The Investment Adviser Association, in commenting on the FAQ, added that while the new FAQs represent important progress, the SEC staff continues to work on clarifying another aspect of the February 2017 Guidance Update on Inadvertent Custody involving the staff views on how the authorized trading exception under the custody rule relates to instruments that do not settle on a “delivery versus payment” basis.
With “well over” 50 FAQs about the custody rule, “perhaps the SEC will acknowledge that it needs to re-write the rule” rather than continue to issue FAQs, Cipperman opines.