NASAA Series 65, Uniform Investment Adviser Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesHard
A client has provided an investment adviser representative (IAR) with limited power of attorney, allowing the IAR to execute trades in the client's account but not to withdraw funds. If the IAR also directly receives client checks made out to the IA firm for advisory fees, but immediately forwards them to the firm's designated lockbox, does this constitute 'custody' under the Uniform Securities Act?
- AYes, because the IAR has temporary possession of client funds, which is considered custody.
- BNo, because advisory fees are not considered 'client funds' in terms of custody rules.
- CYes, because the IAR has limited power of attorney over the account.
- DNo, because the IAR does not have the authority to withdraw funds, and the checks are promptly forwarded.
Show answer & explanationAnswer & explanation
Correct answer: D. No, because the IAR does not have the authority to withdraw funds, and the checks are promptly forwarded.
Custody is defined broadly, but receiving client checks made out to the IA firm and promptly forwarding them to a designated lockbox (within 3 business days) is typically an exception and does NOT constitute custody, provided the IA does not have the power to endorse or negotiate the checks. Limited power of attorney for trading also does not, by itself, constitute custody.
Why the other options are wrong
- A. Temporary possession of checks, when promptly forwarded to a lockbox, is generally an exception to the definition of custody.
- B. Advisory fees, once paid, are indeed client funds until settled. The issue is the nature of the IA's control.
- C. Limited power of attorney for trading only grants transactional authority, not control over funds for withdrawal, which is key to custody.
Definition of Custody (IA)
An investment adviser is deemed to have custody if it holds, directly or indirectly, client funds or securities, or has the authority to obtain possession of them.
- Holding client funds/securities.
- Authority to obtain possession (e.g., full power of attorney).
- Exceptions: promptly forwarding checks made out to IA firm.
- Custody triggers strict safeguards.
Memory trick: Custody means Control: Can you touch or take client assets?