NASAA Series 63Regulation of Investment Advisers and IARsHard
An investment adviser representative receives a client's check made payable to a qualified custodian for deposit into the client's account, and forwards the check to the custodian within two business days of receipt without depositing it into any account controlled by the adviser. Under the Uniform Securities Act's custody rules, this activity:
- Aconstitutes custody only if the check amount exceeds $5,000
- Bconstitutes custody, requiring a surprise examination by an independent accountant
- Cconstitutes custody, requiring the adviser to maintain a minimum net worth of $35,000
- Ddoes not constitute custody because checks payable to third parties forwarded within three business days are excluded from the custody definition
Show answer & explanationAnswer & explanation
Correct answer: D. does not constitute custody because checks payable to third parties forwarded within three business days are excluded from the custody definition
Receipt of a check drawn payable to a third party (such as a qualified custodian) that is forwarded to that third party within three business days does not constitute custody, since the adviser never gains control over client funds.
Why the other options are wrong
- A. There is no dollar-amount threshold for this exclusion.
- B. No custody arises, so no surprise examination requirement is triggered.
- C. The $35,000 net worth rule applies to advisers with actual custody, which is absent here.
Inadvertent Custody Exclusion — Third-Party Checks
An adviser is not deemed to have custody when it receives a check made payable to a third party (e.g., custodian) and forwards it within three business days.
- Applies only to checks payable to third parties, not the adviser
- Must be forwarded within 3 business days to avoid custody
- Distinguished from checks payable directly to the adviser, which do trigger custody
Memory trick: Forward fast — three days, no custody blast