Virginia Administrative Code › Title 21 - SECURITIES AND RETAIL FRANCHISING › Agency 5 - STATE CORPORATION COMMISSION › Chapter 80 - INVESTMENT ADVISORS › Part III - Investment Advisor, Federal Covered Advisor, and Investment Advisor Representative Regulations › Section 21VAC5-80-146 - Custody of client funds or securities by investment advisors

Current through Register Vol. 40, No. 24, July 15, 2024
A. For purposes of
				  this section the following definitions shall apply:
"Control" means 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:
1. Each of the investment advisor's officers,
				  partners, or directors exercising executive responsibility (or persons having
				  similar status or functions) is presumed to control the investment
				  advisor.
2. A person is presumed to
				  control a corporation if the person:
a.
				  Directly or indirectly has the right to vote 25% or more of a class of the
				  corporation's voting securities; or
b. Has the power to sell or direct the sale
				  of 25% or more of a class of the corporation's voting securities;
3. 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;
4. A person is presumed to control a limited
				  liability company if the person:
a. Directly
				  or indirectly has the right to vote 25% or more of a class of the interests of
				  the limited liability company;
b.
				  Has the right to receive upon dissolution, or has contributed, 25% or more of
				  the capital of the limited liability company;
c. Is an elected manager of the limited
				  liability company; or
5.
				  A person is presumed to control a trust if the person is a trustee or managing
				  agent of the trust.
"Custody" means holding directly or indirectly, client
					 funds or securities, or having any authority to obtain possession of them or
					 has the ability to appropriate them. The investment advisor 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 advisor provides to clients.
1. Custody includes:
a. Possession of client funds or securities
				  unless the investment advisor 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
				  general power of attorney) under which the investment advisor is authorized or
				  permitted to withdraw client funds or securities maintained with a custodian
				  upon the investment advisor'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 advisor or its supervised person legal
				  ownership of or access to client funds or securities.
2. Receipt of checks drawn by clients and
				  made payable to third parties will not meet the definition of custody if
				  forwarded to the third party within three business days of receipt and the
				  investment advisor maintains the records required under
				  21VAC5-80-160 A 23;
"Independent certified public accountant" means a certified
					 public accountant that meets the standards of independence described in Rule
					 2-01(b) and (c) of Regulation S-X (
					 17 CFR
					 210.2-01(b) and (c)
					 ).
"Independent party" means a person that:
1. Is engaged by the investment advisor to
				  act as a gatekeeper for the payment of fees, expenses, and capital withdrawals
				  from the pooled investment;
2. Does
				  not control and is not controlled by and is not under common control with the
				  investment advisor;
3. Does not
				  have, and has not had within the past two years, a material business
				  relationship with the investment advisor; and
4. Shall not negotiate or agree to have
				  material business relations or commonly controlled relations with an investment
				  advisor for a period of two years after serving as the person engaged in an
				  independent party agreement.
"Independent representative" means a person who:
1. Acts as agent for an advisory client,
				  including in the case of a pooled investment vehicle, for limited partners of a
				  limited partnership, 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, members, or other beneficial owners;
2. Does not control, is not controlled by,
				  and is not under common control with investment advisor; and
3. Does not have, and has not had within the
				  past two years, a material business relationship with the investment advisor.
"Qualified custodian" means:
1. A bank or savings association that has
				  deposits insured by the Federal Deposit Insurance Corporation under the Federal
				  Deposit Insurance Act;
2. A
				  broker-dealer registered in this jurisdiction and with the SEC holding the
				  client assets in customer accounts;
3. A registered futures commission merchant
				  registered under Section 4f(a) of the Commodity Exchange Act, 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
4. 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.
"Related person" means any person, directly or indirectly,
					 controlling or controlled by the investment advisor, and any person that is
					 under common control with the investment advisor.