A state-registered investment adviser (IA) maintains custody of client assets. Which of the following is a specific requirement for the legend that must appear on statements provided to clients by the qualified custodian?
- AThe legend must guarantee the performance of the client's investments held by the custodian.
- BThe legend must state that the IA is not responsible for the accuracy of the custodian's statement.
- CThe legend must advise clients to compare the custodian's statement with the IA's statement.
- DThe legend must confirm that the custodian is insured by the Securities Investor Protection Corporation (SIPC).
Show answer & explanationAnswer & explanation
Correct answer: C. The legend must advise clients to compare the custodian's statement with the IA's statement.
When an IA has custody and a qualified custodian sends statements directly to clients, NASAA's Model Rule on Custody requires a legend on the IA's statements advising clients to compare their IA-generated statements with the independent statements received directly from the qualified custodian. This is a critical fraud prevention measure.
Why the other options are wrong
- A. Guarantees of investment performance are generally prohibited and would never be a required legend.
- B. While indirectly true, the specific legend requirement focuses on comparison, not just disclaimer.
- D. While many custodians are SIPC insured, it's not a required legend on the statements related to IA custody rules.
IA Custody - Statement Legend
When an investment adviser has custody of client assets that are held by a qualified custodian, the IA's statements to clients must include a specific legend advising clients to compare those statements with the independent statements received directly from the qualified custodian.
- Applies when IA has custody and uses a qualified custodian.
- Legend appears on the IA's statements to clients.
- Purpose is fraud prevention and client verification.
- Requires clients to cross-reference statements.
Memory trick: Custodian's Legend: Compare Your Statements, Check for Discrepancies, No Debates!