Unknowing Adviser May Have Custody if it Recommended Custodian
An adviser that recommends a third party custodian will be deemed to have custody of client assets where the custodial agreement allows the adviser to instruct the custodian to disburse or transfer funds or securities, even if the adviser does not know the contents of the custody agreement. However, if the adviser did not recommend, request or require the third party custodian, the adviser will not have inadvertent custody that will require meeting the several elements of the custody rule (206(4)-2), including the surprise examination, notwithstanding the terms of the custody agreement. The staff of the Division of Investment Management seeks to clarify last year’s guidance concerning inadvertent custody (see FAQ II.11).
OUR TAKE: There are now well over 50 FAQs about the custody rule. Perhaps, the SEC will acknowledge that it needs to re-write the rule rather than continue to issue FAQs.