Mississippi Administrative Code › Title 1 - Secretary of State › Part 14 - Securities Regulation › Chapter 6 - INVESTMENT ADVISERS › Rule 1-14-6.35 - Custody of Client Funds or Securities by Investment Advisers

Current through June 25, 2024
A.
Safekeeping required
. If
				an investment adviser is registered or required to be registered under the Act,
				it is unlawful for the investment adviser to have custody of client funds or
				securities unless:
1.
Notice to
				Division
. The investment adviser notifies the Division promptly in
				writing 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 either:
a. In a separate account for each client
				under that client's name; or
b. In
				accounts that contain only the adviser's clients' funds and securities, under
				the adviser's name as agent or trustee for the clients.
3.
Notice to clients
. If an
				investment adviser opens an account with a qualified custodian on its client's
				behalf, either under the client's name or under the name of the investment
				adviser as agent, the investment adviser must notify the client in writing of
				the qualified custodian's name, address, and the manner in which the funds or
				securities are maintained, promptly when the account is opened and following
				any changes to this information.
4.
				Account statements must be sent to clients, either by a qualified custodian or
				by the investment adviser.
a.
By a
				qualified custodian
. The investment adviser has reasonable basis 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.
b.
By the
				investment adviser
.
i. The investment
				adviser sends an account statement, at least quarterly, to each client for whom
				the investment adviser has custody of funds or securities, identifying the
				amount of funds and of each security of which the investment adviser has
				custody at the end of the period and setting forth all transactions during that
				period.
ii. An independent
				certified public accountant verifies all client funds and securities by actual
				examination at least once during each calendar year at a time chosen by the
				accountant without prior notice or announcement to the adviser and that is
				irregular from year to year, and files a copy of the special examination report
				with the Division within thirty (30) days after the completion of the
				examination, along with a letter stating that it has examined the funds and
				securities and describing the nature and extent of the examination.
iii. The independent certified public
				accountant, upon finding any material discrepancies during the course of the
				examination, notifies the Division within one (1) 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 Division.
c.
Special rule for limited
				partnerships and limited liability companies
.
If the adviser 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), the account statements
				  required under Subsection (A)(4) of this Rule must be sent to each limited
				  partner (or member or other beneficial owner or their independent
				  representative).
5.
Independent
				representatives
. A client may designate an independent representative
				to receive, on his behalf, notices and account statements as required under
				Subsections (A)(3) and (A)(4) of this Rule.
6.
Direct fee deduction
. An
				adviser who has custody as defined in Subsections (C)(1)(c) of this Rule by
				having fees directly deducted from client accounts must, in addition to the
				safekeeping requirements set forth in Subsections (A)(1) through (4) of this
				Rule, also comply with the following additional safeguards:
a.
Written authorization
.
				The adviser must have written authorization from the client to deduct advisory
				fees from the account held with the qualified custodian.
b.
Notice of fee deduction
.
				Each time a fee is directly deducted from a client account, the adviser must
				concurrently:
i. Send the qualified custodian
				an invoice of the amount of the fee to be deducted from the client's account;
				and
ii. Send the client an invoice
				itemizing the fee. Itemization includes the formula used to calculate the fee,
				the amount of assets under management the fee is based on, and the time period
				covered by the fee.
c.
Notice of safeguards
. The investment adviser notifies the
				Division in writing that the investment adviser intends to use the additional
				safeguards provided above. Such notification is required to be given on Form
				ADV.
d.
Waiver of Bonding,
				Net Worth, or Financial Reporting Requirements
. An investment adviser
				having custody solely because it meets the definition of custody as defined in
				Subsection (C)(1)(c) of this Rule and who complies with the safekeeping
				requirements in Subsections (A)(1) through (4) of this Rule and employs the
				additional safeguards of Subsections (A)(6)(a) through (c) of this Rule will
				not be required to meet the bonding, net worth, and financial reporting
				requirements for custodial advisers as set forth in Rules
				6.07,
				6.09, and
				6.11.
7.
Pooled investments
. An
				investment adviser who has custody as defined in Subsection (C)(1)(d) of this
				Rule and who does not meet the exception provided under Subsection (B)(3) of
				this Rule must, in addition to the safekeeping requirements set forth in
				Subsections (A)(1) through (4) of this Rule, also comply with the following
				additional safeguards:
a.
Engage an
				independent party
. Hire an independent party to review all fees,
				expenses, and capital withdrawals from the pooled accounts.
b.
Review of fees
. Send 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:
i. Determine that the
				payment is in accordance with the pooled investment vehicle standards
				(generally the partnership agreement or membership agreement); and
ii. Forward to the qualified custodian
				approval for payment of the invoice with a copy to the investment
				adviser.
c. For the
				purposes of this Rule, an
Independent Party
means a person who:
i. Is engaged by the investment adviser to
				act as a gatekeeper for the payment of fees, expenses, and capital withdrawals
				from the pooled investment;
ii.
				Does not control and is not controlled by and is not under common control with
				the investment adviser; and
iii.
				Does not have and has not had within the past two (2) years a material business
				relationship with the investment adviser.
d.
Notice of safeguards
. The
				investment adviser notifies the Division in writing that the investment adviser
				intends to use the additional safeguards provided above. Such notification is
				required to be given on Form ADV.
e.
Waiver of bonding, net worth, or
				financial reporting requirements
. An investment adviser having custody
				solely because it meets the definition of custody as defined in Subsection
				(C)(1)(d) of this Rule and who complies with the safekeeping requirements in
				Subsections (A)(1) through (4) of this Rule and the additional safeguards of
				Subsections (A)(7)(a) through (c) of this Rule will not be required to meet the
				bonding, net worth, and financial reporting requirements for custodial advisers
				as set forth in Rules
				6.05,
				6.07, and
				6.09.
8.
Investment adviser or investment
				adviser representative as trustee
. When a trust retains an investment
				adviser, investment adviser representative, officer, or employee of the adviser
				as trustee and the adviser acts as investment adviser to that trust, the
				adviser will:
a.
Notice of
				safeguards
.
The investment adviser will notify the Division in writing
				  that the investment adviser intends to use the additional safeguards provided
				  below. Such notification is required to be given on Form ADV.
b.
Invoice requirement
.
The investment adviser will send to the grantor of the trust,
				  the attorney for the trust if it is a testamentary trust, the co-trustee,
				  (other than the investment adviser, investment adviser representative, or
				  employee, director, or owner of the investment adviser) or a defined
				  beneficiary of the trust, at the same time that it sends any invoice to the
				  qualified custodian, an invoice showing the amount of the trustees' fee or
				  investment management or advisory fee, the value of the assets on which the
				  fees were based, and the specific manner in which the fees were
				  calculated.
c.
Custodian agreement
. The investment adviser will enter into a
				written agreement with a qualified custodian which specifies:
i.
Payment of fees
. The
				qualified custodian will not deliver trust securities to the investment
				adviser, any investment adviser representative or employee, or director or
				owner of the investment adviser, nor will it transmit any funds to the
				investment adviser, any investment adviser representative, or employee,
				director, or owner of the investment adviser, except that the qualified
				custodian may pay trustees' fees to the trustee and investment management or
				advisory fees to investment adviser, provided that:
(A) The grantor of the trust or attorneys for
				the trust, if it is a testamentary trust, the co-trustee (other than the
				investment adviser, investment adviser representative, or employee, director,
				or owner of the investment adviser), or a defined beneficiary of the trust has
				authorized the qualified custodian in writing to pay those fees;
(B) The statements for those fees show the
				amount of the fees for the trustee and, in the case of statements for
				investment management or advisory fees, show the value of the trust assets on
				which the fee is based and the manner in which the fee was calculated;
				and
(C) The qualified custodian
				agrees to send to the grantor of the trust, the attorneys for a testamentary
				trust, the co-trustee (other than an officer or employee of the adviser, the
				investment adviser, investment adviser representative, or employee, director or
				owner of the investment adviser), or a defined beneficiary of the trust, at
				least quarterly, a statement of all disbursements from the account of the
				trust, including the amount of investment management fees paid to the adviser
				and the amount of trustees' fees paid to the trustee.
ii.
Distribution of assets
.
				Except as otherwise set forth in Subsection (A)(8)(c)(ii)(A) of this Rule
				below, that the qualified custodian may transfer funds or securities or both of
				the trust only upon the direction of the trustee (who may be the investment
				adviser, investment adviser representative, or employee, director, or owner of
				the investment adviser), whom the investment adviser has duly accepted as an
				authorized signatory.
The grantor of the trust or attorneys for the trust, if it is
				  a testamentary trust, the co-trustee (other than the investment adviser;
				  investment adviser representative; or employee, director, or owner of the
				  investment adviser), or a defined beneficiary of the trust must designate the
				  authorized signatory for management of the trust. The direction to transfer
				  funds or securities, or both, can only be made to the following:
(A) A trust company, bank trust department,
				or brokerage firm independent of the adviser for the account of the trust to
				which the assets relate;
(B) The
				named grantors or to the named beneficiaries of the trust;
(C) A third party independent of the adviser
				in payment of the fees or charges of the third person, including, but not
				limited to, (1) attorney's, accountant's, or custodian's fees for the trust;
				and (2) taxes, interest, maintenance, or other expenses, if there is property
				other than securities or cash owned by the trust;
(D) Third parties independent of the adviser
				for any other purpose legitimately associated with the management of the trust;
				or
(E) A broker-dealer in the
				normal course of portfolio purchases and sales, provided that the transfer is
				made on payment against delivery basis or payment against trust
				receipt.
d.
Waiver of bonding, net worth, or financial reporting
				requirements
. An investment adviser who has custody solely because it
				meets the definition of custody as defined in Subsection (C)(1)(d) of this Rule
				and who complies with the safekeeping requirements in Subsections (A)(1)
				through (4) of this Rule and the additional safeguards of Subsections (A)(8)(a)
				through (c) of this Rule will not be required to meet the bonding, net worth,
				and financial reporting requirements for custodial advisers as set forth in
				Rules 6.05,
				6.07, and
				6.09 of the
				Act.