Previously on our blog we discussed situations where advisers are deemed to have custody, Assessing Custody for Registered Investment Advisers. If your firm has deemed itself to have custody, you need to ensure your firm is compliant with the Custody Rule requirements. If this is the case, consider the following:
One of the most critical rules under the Investment Advisers Act of 1940 (“Advisers Act”) is the custody rule, which is designed to protect advisory clients from the misuse or misappropriation of their funds and securities. With an adequate custody assessment, your firm should be able to recognize whether it has “custody” as defined under the custody rule and has appropriate controls to comply with the custody requirements. Your firm should also build appropriate controls and procedures to ensure future compliance with the custody rule, as applicable to the firm.
Investment advisers that have custody of client funds or securities are required to undergo an annual surprise examination by an independent public accountant to verify client funds and securities. Form ADV-E is used as a cover page for a certificate of accounting of securities and funds of which the investment adviser has custody, aka a surprise exam report. Form ADV-E contains both information about the adviser and the surprise exam conducted. The Form ADV-E is filled out by the investment adviser and then submitted along with the surprise examination report or statement by the independent public accountant after a surprise inspection of the adviser.
Also, State registered advisers should review and verify compliance with state regulatory requirements governing the business of investment advisers. The regulation of investment advisers can vary significantly from one state to the other. Attempts to unify the patchwork of state requirements have fallen short, and the only sure way to determine the specific requirements of a state is to refer directly to the state’s securities laws and regulations, which many states make available online. Due to the practical difficulty of identifying and keeping current on the requirements of each state in which an investment adviser conducts business, it is often advantageous for an investment adviser to adopt a policy that requires it to comply with all state requirements.
Provided below is a non-exhaustive list of common regulatory requirements that states impose on investment advisers. Any investment adviser that does not comply with a particular requirement should thoroughly document its basis for believing that the requirement does not apply in the states in which it conducts business.
For information on investment adviser registration in each state, check out NASAA’s State Investment Adviser Registration Information.
As a registered adviser, you must make and keep true, accurate and current certain books and records relating to your investment advisory business. Federal covered advisers registered under section 203 of the Act (15 U.S.C. 80b-3) are required by the SEC to make and keep true, accurate and current books and records relating to its investment advisory business of the following:
It is evident that the U.S. Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) are constantly putting efforts forward to navigate the unchartered waters of cryptocurrency. Just days before Blockstack’s Reg A+ token offering received SEC approval, the SEC and FINRA issued a joint statement to provide guidance and encourage innovation and ongoing discussions with market participants on the idea of the custody of cryptocurrency for broker-dealers.