13.3 Custody and Safeguarding Client Assets
Safeguarding client assets prevents embezzlement and conversion. Advisers with custody are subject to heightened net worth bonding, audit filings, and statement delivery standards.
Key NASAA Exam Takeaways
- Custody means holding, directly or indirectly, client funds or securities, or having authority to obtain possession of them.
- Automatic fee deduction constitutes custody under NASAA rules (requires written authorization, notice to client, and itemized billing).
- Qualified Custodian: Client funds must be maintained with a qualified custodian (bank, registered BD, savings association).
- Surprise Annual Audit: Advisers with custody must undergo an annual surprise examination by an independent CPA.
- Inadvertent Receipt (The 3-Day Rule): Receiving client checks payable to a third party or stock certificates does not constitute custody IF returned or forwarded within 3 BUSINESS DAYS.
Knowledge Checkpoint • Section 13.3
An investment adviser inadvertently receives a client check made payable to an independent clearing broker-dealer. To avoid being deemed to have taken custody of client funds under the Uniform Securities Act, the adviser must: