Minnesota Administrative Rules
Agency 120 - Commerce Department
Chapter 2876 - REGULATING SECURITIES
Part 2876.4116 - CUSTODY REQUIREMENTS FOR INVESTMENT ADVISERS
Universal Citation: MN Rules 2876.4116
Current through Register Vol. 49, No. 13, September 23, 2024
Subpart 1. Safekeeping required.
It is unlawful and deemed to be a fraudulent, deceptive, or manipulative act, practice, or course of business for an investment adviser to have custody of client funds or securities unless:
A. The investment adviser notifies the
administrator promptly in writing that the investment adviser has or is
authorized to have custody of client funds or securities. The notification is
required to be given on Form ADV.
B. A qualified custodian maintains those
funds and securities:
(1) in a separate
account for each client under that client's name; or
(2) in 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.
C. If an investment adviser opens an account
with a qualified custodian on its client's behalf, either under the client's
name or under the name of the investment adviser as agent, the investment
adviser must 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
must be sent to clients, either:
(1) by a
qualified custodian. The investment adviser must 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) by the investment
adviser.
(a) The investment adviser must 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.
(b) An independent
certified public accountant retained by the investment adviser must 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 investment adviser and that is irregular from year to year,
and file a copy of the special examination report with the administrator within
30 days after the completion of the examination, along with a letter stating
that it has examined the funds and securities and describing the nature and
extent of the examination.
(c) The
independent certified public accountant, upon finding any material
discrepancies during the course of the examination, must notify the
administrator within one business day of the finding, by means of a facsimile
transmission or electronic mail, followed by first class mail, directed to the
attention of the administrator; or
(3) if the investment adviser 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 this item must be sent to each
limited partner, or member or other beneficial owner or their independent
representative.
E. A
client may designate an independent representative to receive, on the client's
behalf, notices and account statements as required under items C and
D.
F. An investment adviser who has
custody as defined in subpart
3, item A, subitem (1), unit
(b), by having fees directly deducted from client accounts must also provide
the following safeguards:
(1) the investment
adviser must have written authorization from the client to deduct advisory fees
from the account held with the qualified custodian;
(2) each time a fee is directly deducted from
a client account, the investment adviser must concurrently:
(a) send the qualified custodian an invoice
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 must notify the administrator in writing that the
investment adviser intends to use the safeguards provided above. Notification
is required to be given on Form ADV; and
(4) an investment adviser having custody
solely because it meets the definition of custody as defined in subpart
3, item A, subitem (1), unit
(b), and who complies with the safekeeping requirements in items A to F, will
not be required to meet the financial requirements for custodial advisers in
parts
2876.4112 and
2876.4113, subpart
1, or the bonding requirement
in part
2876.4115.
G. An investment adviser who has custody as
defined in subpart
3, item A, subitem (1), unit
(c), and who does not meet the exception provided under subpart
2, item C, must, in addition
to the safeguards in items A to E, also comply with the following:
(1) hire an independent party to review all
fees, expenses, and capital withdrawals from the pooled accounts;
(2) send all invoices or receipts to the
independent party, detailing the amount of the fee, expenses, or capital
withdrawal and the method of calculation such that the independent party can:
(a) determine that the payment is in
accordance with the pooled investment vehicle standards (generally the
partnership agreement or membership agreement); and
(b) forward, to the qualified custodian,
approval for payment of the invoice with a copy to the investment
adviser;
(3) for
purposes of this item, "independent party" means a person that:
(a) is engaged by the investment adviser to
act as a gatekeeper for the payment of fees, expenses, and capital withdrawals
from the pooled investment;
(b)
does not control and 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;
(4) the investment adviser notifies the
administrator in writing on Form ADV that the investment adviser intends to use
the safeguards provided in subitems (1) and (2); and
(5) an investment adviser having custody
solely because it meets the definition of custody as defined in subpart
3, item A, subitem (1), unit
(c), and who complies with the safekeeping requirements in items A to E and G
will not be required to meet the financial requirements for custodial
investment advisers in parts
2876.4112 and
2876.4113, subpart
1, or the bonding requirement
in part
2876.4115.
H. When a trust retains an investment adviser
or employee, director, or owner of an investment adviser as trustee and the
investment adviser acts as the investment adviser to that trust, the investment
adviser will:
(1) notify the administrator in
writing on Form ADV that the investment adviser intends to use the safeguards
provided in subitems (2) and (3);
(2) send to the grantor of the trust, the
attorney for the trust if it is a testamentary trust, the cotrustee (other than
the investment adviser or employee, director, or owner of the investment
adviser) or a defined beneficiary of the trust, at the same time that it sends
any invoice to the qualified custodian, an invoice showing the amount of the
trustees' fee or investment management or advisory fee, the value of the assets
on which the fees were based, and the specific manner in which the fees were
calculated;
(3) enter into a
written agreement with a qualified custodian that specifies:
(a) that the qualified custodian will not
deliver trust securities to the investment adviser or employee, director, or
owner of the investment adviser, nor will transmit any funds to the investment
adviser or employee, director, or owner of the investment adviser, except that
the qualified custodian may pay trustees' fees to the trustee and investment
management or advisory fees to the investment adviser, provided that:
i. the grantor of the trust or attorneys for
the trust, if it is a testamentary trust, the cotrustee (other than the
investment adviser or employee, director, or owner of the investment adviser),
or a defined beneficiary of the trust has authorized the qualified custodian in
writing to pay those fees;
ii. the
statements for those fees show the amount of the fees for the trustee and, in
the case of statements for investment management or advisory fees, show the
value of the trust assets on which the fee is based and the manner in which the
fee was calculated; and
iii. the
qualified custodian agrees to send to the grantor of the trust, the attorneys
for a testamentary trust, the cotrustee (other than the investment adviser or
employee, director, or owner of the investment adviser), or a defined
beneficiary of the trust, at least quarterly, a statement of all disbursements
from the account of the trust, including the amount of investment management
fees paid to the investment adviser and the amount of trustees' fees paid to
the trustee; and
(b)
except as otherwise set forth in subunit i, that the qualified custodian may
transfer funds or securities, or both, of the trust only upon the direction of
the trustee, who may be the investment adviser or employee, director, or owner
of the investment adviser, who the investment adviser has duly accepted as an
authorized signatory. The grantor of the trust or attorneys for the trust, if
it is a testamentary trust, the cotrustee (other than the investment adviser or
employee, director, or owner of the investment adviser), or a defined
beneficiary of the trust must designate the authorized signatory for management
of the trust. The direction to transfer funds or securities, or both, can only
be made to the following:
i. a trust company,
bank trust department, or brokerage firm independent of the investment adviser
for the account of the trust to which the assets relate;
ii. the named grantors or to the named
beneficiaries of the trust;
iii. a
third party independent of the investment adviser in payment of the fees or
charges of the third party including, but not limited to, attorney,
accountant's, or qualified custodian's fees for the trust, and taxes, interest,
maintenance, or other expenses, if there is property other than securities or
cash owned by the trust;
iv. third
parties independent of the investment adviser for any other purpose
legitimately associated with the management of the trust; or
v. a broker-dealer in the normal course of
portfolio purchases and sales, provided that the transfer is made on payment
against delivery basis or payment against trust receipt; and
(4) not be required to
meet the financial requirements for custodial investment advisers in part
2876.4112 and
2876.4113, subpart
1, or the bonding requirement
in part
2876.4115 if the investment
adviser has custody solely because it meets the definition of custody as
defined in subpart
3, item A, subitem (1), unit
(c), and complies with the safekeeping requirements in items A to E and this
item.
Subp. 2. Exceptions.
A.
With respect to shares of an open-end company as defined in Section 5(a)(1) of
the Investment Company Act of 1940 ("mutual fund"), the investment adviser may
use the mutual fund's transfer agent in lieu of a qualified custodian for
purposes of complying with subpart
1.
B. Certain privately offered securities.
(1) The investment adviser is not required to
comply with subpart
1 with respect to securities
that are:
(a) acquired from the issuer in a
transaction or chain of transactions not involving any public
offering;
(b) uncertificated and
ownership thereof is recorded only on books of the issuer or its transfer agent
in the name of the client; and
(c)
transferable only with prior consent of the issuer or holders of the
outstanding securities of the issuer.
(2) Notwithstanding subitem (1), the
provisions of this item are available with respect to securities held for the
account of a limited partnership (or limited liability company, or other type
of pooled investment vehicle) only if the limited partnership is audited, the
audited financial statements are distributed, as described in item C and the
investment adviser notifies the administrator in writing on Form ADV that the
investment adviser intends to provide audited financial statements, as
described in this subitem.
C. An investment adviser is not required to
comply with subpart
1, item D, with respect to
the account of a limited partnership (or limited liability company, or another
type of pooled investment vehicle) that is subject to an audit at least
annually and distributes its audited financial statements prepared in
accordance with generally accepted accounting principles to all limited
partners (or members or other beneficial owners) within 120 days of the end of
its fiscal year. The investment adviser must also notify the administrator in
writing on Form ADV that the investment adviser intends to employ the use of
the audit safeguards described in this item.
D. The investment adviser is not required to
comply with this part with respect to the account of an investment company
registered under the Investment Company Act of 1940.
E. An investment adviser is not required to
comply with safekeeping requirements of Minnesota Statutes, section
80A.66,
subsection (f), or the net worth and bonding requirements of parts
2876.4112,
2876.4113, subpart
1, and 2876.4115, if the
investment adviser has custody solely because the investment adviser or
employee, director, or owner of the investment adviser is a trustee for a
beneficial trust, if all of the following conditions are met for each trust.
(1) The beneficial owner of the trust is a
parent, a grandparent, a spouse, a sibling, a child, or a grandchild of the
trustee. These relationships shall include "step" relationships.
(2) For each account under subitem (1), the
investment adviser complies with the following:
(a) the investment adviser provides a written
statement to each beneficial owner of the account setting forth a description
of the requirements of subpart
1 and the reasons why the
investment adviser will not be complying with those requirements;
(b) the investment adviser obtains from each
beneficial owner a signed and dated statement acknowledging the receipt of the
written statement required in unit (a); and
(c) the investment adviser maintains a copy
of both documents described in units (a) and (b) until the account is closed or
the investment adviser is no longer trustee.
F. Any investment adviser who intends to have
custody of client funds or securities but is not able to utilize a qualified
custodian as defined in subpart
3, item C, must first obtain
approval from the administrator and must comply with all of the applicable
safekeeping provisions under subpart
1, including taking
responsibility for those provisions that are designated to be performed by a
qualified custodian.
Subp. 3. Definitions.
For purposes of this part, the following terms have the meanings given them.
A. "Custody"
means holding directly or indirectly, client funds or securities, or having any
authority to obtain possession of them, or having the ability to appropriate
them.
(1) Custody includes:
(a) possession of client funds or securities
unless received inadvertently and returned 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.
(2) Receipt of checks drawn by clients and
made payable to unrelated third parties will not meet the definition of custody
if forwarded to the third party within 24 hours of receipt.
B. "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 the investment adviser;
and
(3) does not have, and has not
had within the past two years, a material business relationship with the
investment adviser.
C.
"Qualified custodian" means the following independent institutions or entities
that are not affiliated with the investment adviser by any direct or indirect
common control and have not had a material business relationship with the
investment adviser in the previous two years:
(1) a bank or savings association that has
deposits insured by the Federal Deposit Insurance Corporation under the Federal
Deposit Insurance Act;
(2) a
registered broker-dealer 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.
Statutory Authority: MS s 45.023; 80A.82
Disclaimer: These regulations may not be the most recent version. Minnesota may have more current or accurate information. We make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained on this site or the information linked to on the state site. Please check official sources.
This site is protected by reCAPTCHA and the Google
Privacy Policy and
Terms of Service apply.
