NASAA Series 63Regulation of Investment Advisers and IARsMedium
A state-registered investment adviser maintains physical possession of client stock certificates in a safe at its office and periodically sends clients its own hand-prepared account statements. Which change would bring this adviser into compliance with custody safekeeping requirements under the Uniform Securities Act?
- AObtaining client written consent to waive the safekeeping requirement
- BContinuing the current practice, since the adviser's own statements are sufficient
- CRetitling the securities into the adviser's own name for easier tracking
- DDepositing the securities with a qualified custodian (bank or broker-dealer) that sends account statements directly to clients at least quarterly
Show answer & explanationAnswer & explanation
Correct answer: D. Depositing the securities with a qualified custodian (bank or broker-dealer) that sends account statements directly to clients at least quarterly
Advisers with custody must place client funds and securities with a qualified custodian, and clients must receive account statements directly from that custodian, not solely from the adviser. Self-custody with adviser-generated statements does not satisfy the rule.
Why the other options are wrong
- A. Custody safekeeping requirements cannot be waived by client consent alone.
- B. Self-generated statements from the adviser holding the assets do not satisfy the independent verification purpose of the rule.
- C. Titling securities in the adviser's name increases misappropriation risk and is prohibited practice.
Custody Safekeeping Rule
An adviser with custody of client funds/securities must place them with a qualified custodian, who must send account statements directly to clients at least quarterly.
- Qualified custodians include banks and broker-dealers
- Statements must come directly from custodian, not the adviser
- Self-holding assets without a custodian violates the rule
Memory trick: Let the bank hold it, let the bank tell them.