Pennsylvania Code › Title 10 - BANKING AND SECURITIES › Part VII - Securities › Subpart D - Fraudulent and Prohibited Practices › Chapter 404 - PROHIBITED ACTIVITIES; INVESTMENT ADVISERS AND INVESTMENT ADVISER REPRESENTATIVES › Section 404.014 - Custody requirements for investment advisers

Current through Register Vol. 54, No. 28, July 13, 2024
(a)
Safekeeping required
. It
				  is unlawful and considered to be a fraudulent, deceptive or manipulative act,
				  practice or course of business, within the meaning of section 404 of the act
				  (70
				  P.S. §
											1-404), for an investment
				  adviser, registered or required to be registered under section 301 of the act
				  (70
				  P.S. §
											1-301), to have custody of client
				  funds or securities unless:
(1) The investment
				  adviser notifies the Department promptly in writing on Form ADV that the
				  investment adviser has or may have custody.
(2) A qualified custodian maintains those
				  funds and securities in one of the following:
(i) A separate account for each client under
				  that client's name.
(ii) 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) The investment adviser meets the
				  following conditions:
(i) If the 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 shall
				  notify the client in writing of the qualified custodian's name, address and how
				  the funds or securities are maintained, promptly when the account is opened and
				  following any changes to this information.
(ii) If the investment adviser sends account
				  statements to a client to which the investment adviser is required to provide
				  the notice in subparagraph (i), the investment adviser shall 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.
(4)
				  The investment adviser meets the following conditions:
(i) 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 and the account statement:
(A) Identifies the amount of funds in the
				  account.
(B) Identifies the amount
				  of each security in the account at the end of the period.
(C) Sets forth all transactions in the
				  account during that period.
(ii) 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), the account statements required under paragraph (3)
				  shall be sent to each limited partner (or member or other beneficial
				  owner).
(5) The
				  investment adviser meets the following conditions:
(i) 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,
				  under 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 previous notice or announcement to the
				  investment adviser and that is irregular from year to year.
(ii) The written agreement provides for the
				  first examination to occur within 6 months of becoming subject to this
				  paragraph, except that, if the investment adviser maintains client funds or
				  securities under this section as a qualified custodian, the agreement must
				  provide for the first examination to occur no later than 6 months after
				  obtaining the internal control report.
(iii) The written agreement must require the
				  independent certified public accountant to:
(A) File a certificate on Form ADV-E with the
				  Department within 120 days of the time chosen by the independent certified
				  public accountant in this paragraph, stating that it has examined the funds and
				  securities and describing the nature and extent of the examination.
(B) Notify the Department within 1 business
				  day of the finding, by means of a facsimile transmission or e-mail, followed by
				  first class mail, directed to the attention of the Department on finding any
				  material discrepancies during the course of the examination.
(C) File Form ADV-E within 4 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,
				  accompanied by a statement that includes:
(I)
				  The date of resignation, dismissal, removal or other termination, and the name,
				  address and contact information of the independent certified public
				  accountant.
(II) An explanation of
				  any problems relating to examination scope or procedure that contributed to
				  resignation, dismissal, removal or other termination.
(6) If the investment
				  adviser has custody because a related person maintains client funds or
				  securities under this section as a qualified custodian in connection with
				  advisory services the investment adviser provides to clients, the investment
				  adviser shall obtain, or receive from its related person, within 6 months of
				  becoming subject to this paragraph and thereafter no less frequently than once
				  each calendar year a written internal control report prepared by an independent
				  certified public accountant that performs the independent verification required
				  under paragraph (5) that complies with the following:
(i) 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.
(ii) The
				  independent certified public accountant shall verify that the funds and
				  securities are reconciled to a custodian other than the investment adviser or
				  the investment adviser's related person.
(7) A client may designate an independent
				  representative to receive, on his behalf, notices and account statements as
				  required under paragraphs (3) and (4).