Texas Administrative Code › Title 7 - BANKING AND SECURITIES › Part 7 - STATE SECURITIES BOARD › Chapter 116 - INVESTMENT ADVISERS AND INVESTMENT ADVISER REPRESENTATIVES › Section 116.17 - Custody of Funds or Securities of Clients by Registered Investment Advisers

Current through Reg. 49, No. 28; July 12, 2024
(a)
				Definitions. The following words and terms, when used in this section, shall
				have the following meanings, unless the context clearly indicates otherwise.
(1) Audit--when used in regard to financial
				statements, an examination of the financial statements by an independent
				accountant in accordance with generally accepted auditing standards, as may be
				modified or supplemented by the Board, for the purpose of expressing an opinion
				thereon.
(2) Control--the power,
				directly or indirectly, to direct the management or policies of a person,
				whether through ownership of securities, by contract, or otherwise. Control
				includes:
(A) each of the investment
				adviser's officers, partners, or directors exercising executive responsibility
				(or persons having similar status or functions) is presumed to control the
				firm;
(B) a person is presumed to
				control a corporation if the person:
(i)
				directly or indirectly has the right to vote 25% or more of a class of the
				corporation's voting securities; or
(ii) has the power to sell or direct the sale
				of 25% or more of a class of the corporation's voting securities;
(C) a person is presumed to
				control a partnership if the person has the right to receive upon dissolution,
				or has contributed, 25% or more of the capital of the partnership;
(D) a person is presumed to control a limited
				liability company if the person:
(i) directly
				or indirectly has the right to vote 25% or more of a class of the interests of
				the limited liability company;
(ii)
				has the right to receive upon dissolution, or has contributed, 25% or more of
				the capital of the limited liability company; or
(iii) is an elected manager of the limited
				liability company; or
(E) a person is presumed to control a trust
				if the person is a trustee or managing agent of the trust.
(3) Custody--holding, directly or indirectly,
				client funds or securities, or having any authority to obtain possession of
				them. The investment adviser has custody if a related person holds, directly or
				indirectly, client funds or securities, or has any authority to obtain
				possession of them, in connection with advisory services the investment adviser
				provides to clients. Custody includes:
(A)
				possession of client funds or securities (but not of checks drawn by clients
				and made payable to third parties) unless the investment adviser receives them
				inadvertently and returns them to the sender promptly but in any case within
				three business days of receiving them;
(B) any arrangement (including a general
				power of attorney) under which the investment adviser is authorized or
				permitted to withdraw client funds or securities maintained with a custodian
				upon the investment adviser's instruction to the custodian; and
(C) any capacity (such as general partner of
				a limited partnership, managing member of a limited liability company or a
				comparable position for another type of pooled investment vehicle, or trustee
				of a trust) that gives the investment adviser or its supervised person legal
				ownership of or access to client funds or securities.
(4) Independent public accountant--a public
				accountant that meets the standards of independence described in Securities and
				Exchange Commission, Rule 2-01(b) and (c) of Regulation S-X (RSA 210.2-01(b) and
				(c)) as existed on April 1, 2010.
(5) Independent representative--a person
				that:
(A) acts as agent for an advisory
				client, including in the case of a pooled investment vehicle, for limited
				partners of a limited partnership (or members of a limited liability company,
				or other beneficial owners of another type of pooled investment vehicle) and by
				law or contract is obliged to act in the best interest of the advisory client
				or the limited partners (or members, or other beneficial owners);
(B) does not control, is not controlled by,
				and is not under common control with the investment adviser; and
(C) does not have, and has not had within the
				past two years, a material business relationship with the investment
				adviser.
(6) Open-end
				company--a management company which is offering for sale or has outstanding any
				redeemable security of which it is the issuer.
(7) Operationally independent--for purposes
				of subsection (c)(6) of this section, a related person is presumed not to be
				operationally independent unless each of the following conditions is met and no
				other circumstances can reasonably be expected to compromise the operational
				independence of the related person:
(A)
				client assets in the custody of the related person are not subject to claims of
				the adviser's creditors;
(B)
				advisory personnel do not have custody or possession of, or direct or indirect
				access to client assets of which the related person has custody, or the power
				to control the disposition of such client assets to third parties for the
				benefit of the adviser or its related persons, or otherwise have the
				opportunity to misappropriate such client assets;
(C) advisory personnel and personnel of the
				related person who have access to advisory client assets are not under common
				supervision; and
(D) advisory
				personnel do not hold any position with the related person or share premises
				with the related person.
(8) Qualified custodian--
(A) a bank as defined in the Investment
				Advisers Act of 1940, §202(a)(2), or a savings association as defined in
				the Federal Deposit Insurance Act, §3(b)(1), that has deposits insured by
				the Federal Deposit Insurance Corporation under the Federal Deposit Insurance
				Act;
(B) a broker-dealer registered
				under the Securities Exchange Act of 1934, §15(b)(1), holding the client
				assets in customer accounts;
(C) a
				futures commission merchant registered under the Commodity Exchange Act,
				§4f(a), holding the client assets in customer accounts, but only with
				respect to clients' funds and security futures, or other securities incidental
				to transactions in contracts for the purchase or sale of a commodity for future
				delivery and options thereon; and
(D) a foreign financial institution that
				customarily holds financial assets for its customers, provided that the foreign
				financial institution keeps the advisory clients' assets in customer accounts
				segregated from its proprietary assets.
(9) Related person--any person, directly or
				indirectly, controlling or controlled by the investment adviser, and any person
				that is under common control with the investment adviser.