SEC Releases Updates to Custody Rule Frequently Asked Questions
On June 5, the Securities and Exchange Commission’s Division of Investment Management staff (Staff) updated its “Staff Responses to Questions About the Custody Rule” (Custody Rule FAQs). The Custody Rule FAQs address questions regarding Rule 206(4)-2 of the Investment Advisers Act of 1940, the “Custody Rule.” The update to the Custody Rule FAQs specifically addressed concerns regarding the Staff’s February 2017 Guidance Update titled: “Inadvertent Custody: Advisory Contract Versus Custodial Contract Authority” (Guidance Update). The Guidance Update indicated that investment advisers may inadvertently have custody (Inadvertent Custody) of client assets due to provisions in a separate custodial agreement entered into between its advisory client and a qualified custodian that allow the investment adviser to instruct the custodian to disburse, or transfer, client funds or securities.
The June 2018 update to the Custody Rule FAQs clarified that if an investment adviser does not have a copy of a client’s custodial agreement, and does not know, or have reason to know whether the agreement would give the investment adviser Inadvertent Custody, the investment adviser will not need to comply with the Custody Rule with respect to such client account as long as the sole basis for custody of such account is Inadvertent Custody. In addition, the investment adviser would not need to indicate in its Form ADV that it has custody of such client’s assets. However, the Staff stated that this relief would not apply if the investment adviser recommended, requested or required a client’s custodian.
The Custody Rule FAQs are available here. The revised FAQs are Question II.11 and Question 11.12.