NASAA Series 65, Uniform Investment Adviser Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesHard
An investment adviser (IA) maintains custody of client funds and securities. According to NASAA's Model Rule on Custody, which of the following is NOT a required safeguard when an IA has custody?
- ANotifying the Administrator in writing within three business days of opening a client's custodial account.
- BMaintaining client funds and securities in a separate account from the IA's own assets.
- CUndergoing an annual surprise examination by an independent public accountant.
- DSending quarterly account statements to clients.
Show answer & explanationAnswer & explanation
Correct answer: A. Notifying the Administrator in writing within three business days of opening a client's custodial account.
While an IA must notify the Administrator if it takes or relinquishes custody, there is no specific requirement to notify the Administrator every time a new client custodial account is opened within three business days. The other options are all explicit requirements for IAs with custody under NASAA's Model Rule.
Why the other options are wrong
- B. Segregation of client assets is fundamental to protecting them from the IA's creditors and misuse.
- C. The annual surprise examination by an independent accountant is a critical safeguard to verify assets.
- D. Quarterly statements are a key requirement for IAs with custody, ensuring clients are informed.
IA Custody Safeguards
Specific rules and practices required for investment advisers who have physical possession or control over client funds or securities.
- Qualified custodian required.
- Quarterly statements to clients.
- Annual surprise examination.
- Segregated client accounts.
Memory trick: Custody means Care: Segregate, Statements, Surprise, and Safeguard.