California Code of Regulations › Title 10 - Investment › Chapter 3 - Commissioner of Financial Protection and Innovation › Subchapter 2 - Corporate Securities › Article 10 - Licensing and Regulation of Investment Advisers › Section 260.237 - Custody or Possession of Funds or Securities of Clients

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a) Safekeeping required. It is unlawful and
				  deemed to be a fraudulent, deceptive, or manipulative act, practice or course
				  of business within the meaning of Section
				  25235 of the Code for an
				  investment adviser licensed or required to be licensed, to have custody of
				  client funds or securities unless:
(1) Notice
				  to the Commissioner. The investment adviser notifies the Commissioner that the
				  investment adviser has or may have custody. Such notification is required to be
				  given on Form ADV.
(2) Qualified
				  custodian. A qualified custodian maintains those funds and securities:
(A) In a separate account for each client
				  under that client's name; or
(B) In
				  accounts that contain only the investment adviser's clients' funds and
				  securities, under the investment adviser's name as agent or trustee for the
				  clients, or, in the case of a pooled investment vehicle that the investment
				  adviser manages, in the name of the pooled investment
				  vehicle.
(3) Notice to
				  clients. If the investment adviser opens an account with a qualified custodian
				  on the investment adviser's client's behalf, under the client's name, under the
				  investment adviser's name as agent or trustee, or under the name of a pooled
				  investment vehicle, the investment adviser shall notify the client in writing
				  of the qualified custodian's name and address, and the manner in which the
				  funds or securities are maintained, promptly upon the opening of the account
				  and following any changes to this information. If the investment adviser sends
				  an account statement to a client to which the investment adviser is required to
				  provide this notice, the investment adviser shall include in the notice
				  provided to that client and in any subsequent account statement sent to that
				  client, a statement urging the client to compare the account statements from
				  the custodian with those from the investment adviser.
(4) Account statements. The investment
				  adviser has a reasonable basis, after due inquiry, for believing that the
				  qualified custodian sends an account statement, at least quarterly, to each
				  client for which it maintains funds or securities, identifying the amount of
				  funds and of each security in the account at the end of the period and setting
				  forth all transactions in the account during that period including investment
				  advisory fees.
(5) Special rule for
				  limited partnerships and limited liability companies. If the investment adviser
				  or a related person is a general partner of a limited partnership (or managing
				  member of a limited liability company, or holds a comparable position for
				  another type of pooled investment vehicle):
(A) The adviser sends to all limited partners
				  (or members or other beneficial owners) at least quarterly, a statement
				  showing:
1. the total amount of all additions
				  to and withdrawals from the fund as a whole as well as the opening and closing
				  value of the fund at the end of the quarter based on the custodian's
				  records;
2. a listing of securities
				  positions on the closing date of the statement required to be disclosed under
				  Generally Accepted Accounting Principles (GAAP) for investment companies that
				  are non-registered investment partnerships, pursuant to Financial Accounting
				  Standards Board (FASB) Accounting Standards Codification 946-210-50-4 through
				  6.
3. a listing of all additions to
				  and withdrawals from the fund by the investor, the total value of the
				  investor's interest in the fund at the end of the quarter.
(B) The investment adviser:
1. Enters into a written agreement with an
				  independent party who is obliged to act in the best interest of the limited
				  partners, members, or other beneficial owners to review all fees, expenses and
				  capital withdrawals from the pooled accounts.
2. Sends all invoices or receipts to the
				  independent party, detailing the amount of the fee, expenses or capital
				  withdrawal and the method of calculation such that the independent party can:
a. determine that the payment is in
				  accordance with the pooled investment vehicle standards (generally the
				  partnership or membership agreement), and
b. forward to the qualified custodian
				  approval for payment of the invoice, with a copy to the investment
				  adviser.
(C)
				  Waiver of Net Worth and Audited Financial Statements. An investment adviser
				  having custody solely because it meets the definition of custody as defined in
				  subparagraph (d)(2)(C) of this section and who otherwise complies with this
				  section will not be required to meet the custodial requirements as set forth in
				  Section 260.237.2 and Section
				  260.241.2 of these
				  rules.
(6) Independent
				  Verification. The client funds and securities of which the investment adviser
				  has custody are verified by actual examination at least once during each
				  calendar year, by an independent certified public accountant, pursuant to a
				  written agreement between the investment adviser and the independent certified
				  public accountant, at a time that is chosen by the independent certified public
				  accountant without prior notice or announcement to the investment adviser and
				  that is irregular from year to year. The written agreement must provide for the
				  first examination to occur within six months of becoming subject to this
				  paragraph, except that, if the investment adviser maintains client funds or
				  securities pursuant to this section as a qualified custodian, the agreement
				  must provide for the first examination to occur no later than six months after
				  obtaining the internal control report required by paragraph (a)(7)(B). The
				  written agreement must require the independent certified public accountant to:
(A) File a certificate on Form ADV-E, Expires
				  January 31, 2016, hereby incorporated by reference, with the Commissioner
				  within 120 days of the time chosen by the independent certified public
				  accountant in section (a)(6) of this section, stating that it has examined the
				  funds and securities and describing the nature and extent of the
				  examination;
(B) Upon finding any
				  material discrepancies during the course of the examination, notify the
				  Commissioner within one business day of the finding, by means of a facsimile
				  transmission or electronic mail, followed by first class mail, directed to the
				  attention of the Commissioner; and
(C) Upon resignation or dismissal from, or
				  other termination of, the engagement, or upon removing itself or being removed
				  from consideration for being reappointed, file within four business days Form
				  ADV-E accompanied by a statement that includes:
1. The date of such resignation, dismissal,
				  removal, or other termination, and the name, address, and contact information
				  of the independent certified public accountant; and
2. An explanation of any problems relating to
				  examination scope or procedure that contributed to such resignation, dismissal,
				  removal, or other termination.
(7) Investment advisers acting as qualified
				  custodians. If the investment adviser maintains, or if the investment adviser
				  has custody because a related person maintains, client funds or securities
				  pursuant to this section as a qualified custodian in connection with advisory
				  services the investment adviser provides to clients:
(A) The independent certified public
				  accountant the investment adviser retains to perform the independent
				  verification required by paragraph (a)(6) of this section must be registered
				  with, and subject to regular inspection as of the commencement of the
				  professional engagement period, and as of each calendar year-end, by the Public
				  Company Accounting Oversight Board in accordance with its rules; and
(B) The investment adviser must obtain, or
				  receive from its related person, within six months of becoming subject to this
				  paragraph and thereafter no less frequently than once every calendar year, a
				  written internal control report prepared by an independent certified public
				  accountant:
1. The internal control report
				  must include an opinion of an independent certified public accountant as to
				  whether controls have been placed in operation as of a specific date, and are
				  suitably designed and are operating effectively to meet control objectives
				  relating to custodial services, including the safeguarding of funds and
				  securities held by either the investment adviser or a related person on behalf
				  of the investment adviser's clients, during the year;
2. The independent certified public
				  accountant must verify that the funds and securities are reconciled to a
				  custodian other than the investment adviser or the investment adviser's related
				  persons; and
3. The independent
				  certified public accountant must be registered with, and subject to regular
				  inspection as of the commencement of the professional engagement period, and as
				  of each calendar year-end, by the Public Company Accounting Oversight Board in
				  accordance with its rules.
(8) Independent representative. A client may
				  designate an independent representative to receive, on his or her behalf,
				  notices and account statements as required under paragraphs (a)(3) and (a)(4)
				  of this section.