Earlier this year, the SEC's Division of Investment Management issued a Guidance Update regarding "inadvertent custody." It's important, so we thought it made sense to provide a Fund Forum refresher. The staff warns that investment advisers may have custody of client funds or securities because of provisions in a separate custodial agreement between its advisory client and a qualified custodian. Unlikely? It would seem so, but read on.
The scenario highlighted by the staff may involve a custodial agreement that grants an adviser "broader access to client funds or securities than the adviser's own agreement with the client." Examples cited by the staff include a custodial agreement (i) granting the adviser the right to "receive money, securities, and property of every kind and dispose of same," (ii) authorizing the custodian to "rely on the [adviser's] instructions without any direction from you," and (iii) authorizing the adviser to "instruct us to disburse cash from your cash account for any purpose." Given this guidance, a review of your custodial agreements may be warranted. To access this IM Guidance Update, click here.