Wisconsin Administrative Code › Department of Financial Institutions › DFI-Sec 1-36 - Department of Financial Institutions-Securities › Chapter DFI-Sec 5 - Registration and notice filing procedures for investment advisers, federal covered investment advisers, and investment adviser representatives › Section DFI-Sec 5.035 - Investment advisors with custody

Current through June 24, 2024
(1) Except as
				provided in sub. (2), and subject to the definitions in sub. (4), it shall be a
				prohibited business practice for an investment adviser registered, or required
				to be registered, to have custody of client funds or securities unless the
				investment adviser complies with all of the following:
(a) The investment adviser notifies the
				division promptly in writing on Form ADV that the investment adviser has or may
				have custody.
Note: Form ADV is available online at the website of the
				  Investment Adviser Registration Depository, www.iard [File Link Not Available],
				  and may be filled out and submitted electronically.
(b) A qualified custodian maintains the funds
				and securities in a separate account for each client under that client's name
				or in accounts that contain only client funds and securities, under the
				investment adviser's name as agent or trustee for the clients.
(c) When an investment adviser opens an
				account with a qualified custodian on a client's behalf, either under the
				client's name or under the investment adviser's name as agent, the investment
				adviser shall 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.
(d) Account statements
				shall be sent to clients in compliance with one of the following:
1. If client funds or securities are held by
				a qualified custodian, the investment adviser shall have a 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.
2. If client funds or
				securities are held by the adviser:
a. The
				investment adviser shall send 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; and
b. The
				investment adviser shall engage an independent certified public accountant to
				verify 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.
				The accountant shall file a copy of the special examination report with the
				division within 30 days after the completion of the examination, stating that
				it has examined the funds and securities and describing the nature and extent
				of the examination; and
c. Within
				one business day of the finding of any material discrepancies identified during
				the course of the examination under subd. 2. b., the accountant shall notify
				the division of the discrepancy by means of a facsimile transmission or
				electronic mail, followed by first class mail, directed to the
				division.
3. If the
				investment adviser is a general partner of a limited partnership, is a managing
				member of a limited liability company, or holds a comparable position for
				another type of pooled investment vehicle, the account statements required
				under par. (d) 1. or 2. a., shall be sent to each limited partner, member or
				other beneficial owner or their independent representative.
(e) If a client does not receive account
				statements and notices directly from the adviser or custodian, the investment
				adviser shall obtain from the client a written designation of an independent
				representative to receive, on the client's behalf, notices and account
				statements as required under pars. (c) and (d).
(f) An adviser who has custody as defined in
				sub. (4) (a) as a result of having fees directly deducted from client accounts,
				as described in sub. (4) (a) 2., shall comply with all of the following:
1. The adviser shall obtain written
				authorization from the client to deduct advisory fees from the account held
				with the qualified custodian.
2.
				Except as provided in subd. 4., each time a fee is directly deducted from a
				client account, the adviser shall concurrently do both of the following:
a. Send the qualified custodian notice of the
				amount of the fee to be deducted from the client's account; and
b. 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.
3. The investment
				adviser notifies the division on Form ADV that the investment adviser intends
				to comply with subds. 1. and 2.
4.
				An investment adviser having custody as described in sub. (4) (a) 2. and who
				complies with the safekeeping requirements in pars. (a) through (f), is not
				required to meet the financial requirements for custodial advisers prescribed
				in s. DFI-Sec 5.02(2).
(g) An investment adviser who has custody as
				described in sub. (4) (a) 3. and who does not meet the exception provided under
				sub. (2) (c) shall comply with each of the following:
1. The investment adviser shall hire an
				independent party as defined in sub. (4) (b) to review all fees, expenses and
				capital withdrawals from the pooled accounts.
2. The investment adviser shall send all
				invoices or receipts to the independent party, detailing the amount of the fee,
				expenses or capital withdrawal, and the method of calculation so that the
				independent party can do both of the following:
a. Determine that the payment is in
				accordance with the pooled investment vehicle standards set forth in the
				partnership agreement or membership agreement.
b. Forward to the qualified custodian,
				written approval for payment of the fee, expense or capital withdrawal, and
				provide a copy to the investment adviser.
3. The investment adviser shall notify the
				division on Form ADV that the investment adviser intends to comply with subds.
				1. and 2.
4. An investment adviser
				having custody as described in sub. (4) (a) 3. and who complies with the
				safekeeping requirements in pars. (a) through (e), together with the
				requirements in par. (g), will not be required to meet the financial
				requirements for custodial advisers prescribed in s. DFI-Sec 5.02(2).