Iowa Administrative Code › Agency 191 - Insurance Division › Securities › Chapter 50 - Regulation of Securities Offerings and Those Who Engage in the Securities Business › Rule 191-50.39 - Custody of Client Funds or Securities by Investment Advisers

Current through Register Vol. 47, No. 3, July 24, 2024
(1)
Safekeeping required.
It is unlawful and deemed to be a
				fraudulent, deceptive, or manipulative act, practice, or course of business for
				an investment adviser, registered or required to be registered, to have custody
				of client funds or securities unless the following conditions are met:
a.
Notice to administrator.
The investment adviser notifies the administrator promptly in writing that the
				investment adviser has or may have custody. Such notification is required to be
				given on Form ADV.
b.
Qualified custodian.
A qualified custodian maintains those
				funds and securities:
(1) In a separate
				account for each client under that client's name; or
(2) 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.
c.
Notice to clients.
If an
				investment adviser opens an account with a qualified custodian on its client's
				behalf, under the client's name, under the name of the investment adviser as
				agent, or under the name of a pooled investment vehicle, the investment adviser
				must 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 when
				the account is opened and following any changes to this information. If the
				investment adviser sends account statements to a client to whom the investment
				adviser is required to provide this notice, the investment adviser must include
				in the notification provided to that client and in any subsequent account
				statement the investment adviser sends that client a statement urging the
				client to compare the account statements from the custodian with those from the
				investment adviser.
d.
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 the qualified
				custodian 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.
e.
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):
(1) The account statements required under
				paragraph 50.39(1)
"d"
must be sent to each limited partner
				(or member or other beneficial owner); and
(2) The investment adviser must:
1. Enter 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; and
2. 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:
* Determine that the payment is in accordance with the pooled
				  investment vehicle standards (generally the partnership agreement or membership
				  agreement); and
* Forward, to the qualified custodian, approval for payment
				  of the invoice with a copy to the investment
				  adviser.
f.
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 (CPA), pursuant to a written agreement
				between the investment adviser and the independent CPA, at a time that is
				chosen by the independent CPA 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
				execution of the written agreement, except that, if the investment adviser
				maintains client funds or securities pursuant to rule
				191-5038. (502) as a qualified
				custodian, the agreement must provide for the first examination to occur no
				later than six months after the investment adviser obtains the internal control
				report. The written agreement must require the independent CPA to:
(1) File a certificate on Form ADV-E with the
				administrator within 120 days of the time chosen by the independent CPA in
				paragraph 50.39(1)
"f ,"
stating that the independent CPA has
				examined the funds and securities and describing the nature and extent of the
				examination;
(2) Notify the
				administrator within one business day of the finding of any material
				discrepancies during the course of the examination, by means of a facsimile
				transmission or electronic mail, followed by first-class mail, directed to the
				attention of the administrator; and
(3) File within four business days of the
				resignation or dismissal from, or other termination of, the engagement, or
				removing itself or being removed from consideration for being reappointed, 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 CPA; and
2. An
				explanation of any problems relating to examination scope or procedure that
				contributed to such resignation, dismissal, removal, or other
				termination.
g.
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 rule
				191-50.39 (502) as a qualified custodian in connection with advisory services
				the investment adviser provides to clients:
(1) The independent CPA that the investment
				adviser retains to perform the independent verification required by paragraph
				50.39(1)
"f"
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
(2)
				The investment adviser must obtain, or receive from its related person, within
				six months of execution of the written agreement and thereafter no less
				frequently than once each calendar year a written internal control report
				prepared by an independent CPA.
1. The
				internal control report must include an opinion of an independent CPA 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 CPA must verify that the
				funds and securities are reconciled to a custodian other than the investment
				adviser or the investment adviser's related person; and
3. The independent CPA 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.
h.
Independent representatives.
A client may designate an
				independent representative to receive, on the client's behalf, notices and
				account statements as required under paragraphs 50.39(1)
"c"
and
"d."