A.
Safekeeping required. If
an investment adviser is registered or required to be registered under the Act,
it is unlawful for the investment adviser to have custody of client funds or
securities unless:
1.
Notice to
Division. The investment adviser notifies the Division promptly in
writing that the investment adviser has or may have custody. Such notification
is required to be given on Form ADV.
2.
Qualified custodian. A
qualified custodian maintains those funds and securities either:
a. In a separate account for each client
under that client's name; or
b. In
accounts that contain only the adviser's clients' funds and securities, under
the adviser's name as agent or trustee for the clients.
3.
Notice to clients. 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.
4.
Account statements must be sent to clients, either by a qualified custodian or
by the investment adviser.
a.
By a
qualified custodian. The investment adviser has 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.
b.
By the
investment adviser.
i. The investment
adviser sends 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.
ii. An independent
certified public accountant verifies 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, and files a copy of the special examination report
with the Division within thirty (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.
iii. The independent certified public
accountant, upon finding any material discrepancies during the course of the
examination, notifies the Division within one (1) 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 Division.
c.
Special rule for limited
partnerships and limited liability companies.
If the 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 Subsection (A)(4) of this Rule must be sent to each limited
partner (or member or other beneficial owner or their independent
representative).
5.
Independent
representatives. A client may designate an independent representative
to receive, on his behalf, notices and account statements as required under
Subsections (A)(3) and (A)(4) of this Rule.
6.
Direct fee deduction. An
adviser who has custody as defined in Subsections (C)(1)(c) of this Rule by
having fees directly deducted from client accounts must, in addition to the
safekeeping requirements set forth in Subsections (A)(1) through (4) of this
Rule, also comply with the following additional safeguards:
a.
Written authorization.
The adviser must have written authorization from the client to deduct advisory
fees from the account held with the qualified custodian.
b.
Notice of fee deduction.
Each time a fee is directly deducted from a client account, the adviser must
concurrently:
i. Send the qualified custodian
an invoice of the amount of the fee to be deducted from the client's account;
and
ii. 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.
c.
Notice of safeguards. The investment adviser notifies the
Division in writing that the investment adviser intends to use the additional
safeguards provided above. Such notification is required to be given on Form
ADV.
d.
Waiver of Bonding,
Net Worth, or Financial Reporting Requirements. An investment adviser
having custody solely because it meets the definition of custody as defined in
Subsection (C)(1)(c) of this Rule and who complies with the safekeeping
requirements in Subsections (A)(1) through (4) of this Rule and employs the
additional safeguards of Subsections (A)(6)(a) through (c) of this Rule will
not be required to meet the bonding, net worth, and financial reporting
requirements for custodial advisers as set forth in Rules
6.07,
6.09, and
6.11.
7.
Pooled investments. An
investment adviser who has custody as defined in Subsection (C)(1)(d) of this
Rule and who does not meet the exception provided under Subsection (B)(3) of
this Rule must, in addition to the safekeeping requirements set forth in
Subsections (A)(1) through (4) of this Rule, also comply with the following
additional safeguards:
a.
Engage an
independent party. Hire an independent party to review all fees,
expenses, and capital withdrawals from the pooled accounts.
b.
Review of fees. 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:
i. Determine that the
payment is in accordance with the pooled investment vehicle standards
(generally the partnership agreement or membership agreement); and
ii. Forward to the qualified custodian
approval for payment of the invoice with a copy to the investment
adviser.
c. For the
purposes of this Rule, an
Independent Party means a person who:
i. Is engaged by the investment adviser to
act as a gatekeeper for the payment of fees, expenses, and capital withdrawals
from the pooled investment;
ii.
Does not control and is not controlled by and is not under common control with
the investment adviser; and
iii.
Does not have and has not had within the past two (2) years a material business
relationship with the investment adviser.
d.
Notice of safeguards. The
investment adviser notifies the Division in writing that the investment adviser
intends to use the additional safeguards provided above. Such notification is
required to be given on Form ADV.
e.
Waiver of bonding, net worth, or
financial reporting requirements. An investment adviser having custody
solely because it meets the definition of custody as defined in Subsection
(C)(1)(d) of this Rule and who complies with the safekeeping requirements in
Subsections (A)(1) through (4) of this Rule and the additional safeguards of
Subsections (A)(7)(a) through (c) of this Rule will not be required to meet the
bonding, net worth, and financial reporting requirements for custodial advisers
as set forth in Rules
6.05,
6.07, and
6.09.
8.
Investment adviser or investment
adviser representative as trustee. When a trust retains an investment
adviser, investment adviser representative, officer, or employee of the adviser
as trustee and the adviser acts as investment adviser to that trust, the
adviser will:
a.
Notice of
safeguards.
The investment adviser will notify the Division in writing
that the investment adviser intends to use the additional safeguards provided
below. Such notification is required to be given on Form ADV.
b.
Invoice requirement.
The investment adviser will send to the grantor of the trust,
the attorney for the trust if it is a testamentary trust, the co-trustee,
(other than the investment adviser, investment adviser representative, 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.
c.
Custodian agreement. The investment adviser will enter into a
written agreement with a qualified custodian which specifies:
i.
Payment of fees. The
qualified custodian will not deliver trust securities to the investment
adviser, any investment adviser representative or employee, or director or
owner of the investment adviser, nor will it transmit any funds to the
investment adviser, any investment adviser representative, 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 investment adviser, provided that:
(A) The grantor of the trust or attorneys for
the trust, if it is a testamentary trust, the co-trustee (other than the
investment adviser, investment adviser representative, 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;
(B) 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
(C) The qualified custodian
agrees to send to the grantor of the trust, the attorneys for a testamentary
trust, the co-trustee (other than an officer or employee of the adviser, the
investment adviser, investment adviser representative, 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 adviser
and the amount of trustees' fees paid to the trustee.
ii.
Distribution of assets.
Except as otherwise set forth in Subsection (A)(8)(c)(ii)(A) of this Rule
below, 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, investment adviser representative, or employee, director, or owner of
the investment adviser), whom 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 co-trustee (other than the investment adviser;
investment adviser representative; 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:
(A) A trust company, bank trust department,
or brokerage firm independent of the adviser for the account of the trust to
which the assets relate;
(B) The
named grantors or to the named beneficiaries of the trust;
(C) A third party independent of the adviser
in payment of the fees or charges of the third person, including, but not
limited to, (1) attorney's, accountant's, or custodian's fees for the trust;
and (2) taxes, interest, maintenance, or other expenses, if there is property
other than securities or cash owned by the trust;
(D) Third parties independent of the adviser
for any other purpose legitimately associated with the management of the trust;
or
(E) 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.
d.
Waiver of bonding, net worth, or financial reporting
requirements. An investment adviser who has custody solely because it
meets the definition of custody as defined in Subsection (C)(1)(d) of this Rule
and who complies with the safekeeping requirements in Subsections (A)(1)
through (4) of this Rule and the additional safeguards of Subsections (A)(8)(a)
through (c) of this Rule will not be required to meet the bonding, net worth,
and financial reporting requirements for custodial advisers as set forth in
Rules 6.05,
6.07, and
6.09 of the
Act.
B.
Exceptions
1.
Shares
of mutual funds. With respect to shares of an open-end company as
defined in Section 5(a)(1) of the Investment Company Act of 1940,
15 U.S.C. §
80a-5(a)(1) (dealing with
"mutual funds"), the investment adviser may use the mutual fund's transfer
agent in lieu of a qualified custodian for purposes of complying with
Subsection (A) of this Rule;
2.
Certain privately offered securities.
a. The investment adviser is not required to
comply with Subsection (A) of this Rule with respect to securities that are:
i. Acquired from the issuer in a transaction
or chain of transactions not involving any public offering;
ii. Uncertificated, and ownership thereof is
recorded only on books of the issuer or its transfer agent in the name of the
client; and
iii. Transferable only
with prior consent of the issuer or holders of the outstanding securities of
the issuer.
b.
Notwithstanding Subsection (B)(2)(i) of this Rule, the provisions of Subsection
(B)(2) of this Rule 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 Subsection (B)(3)
of this Rule, and the investment adviser notifies the Division in writing that
the investment adviser intends to provide audited financial statements, as
described above. Such notification is required to be given on Form
ADV.
3.
Limited
partnerships subject to annual audit. An investment adviser is not
required to comply with Subsections (A)(3) through (4) of this Rule with
respect to the account of a limited partnership (or limited liability company,
or another type of pooled investment vehicle) that is subject to 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 one hundred twenty
(120) days of the end of its fiscal year. The investment adviser must also
notify the Division in writing that the investment adviser intends to employ
the use of the audit safeguards described above. Such notification is required
to be given on Form ADV.
4.
Registered investment companies. The investment adviser is not
required to comply with this Rule with respect to the account of an investment
company registered under the Investment Company Act of 1940,
15 U.S.C. §§
80a-1 to
80a-64.
5.
Beneficial trusts. The
investment adviser is not required to comply with safekeeping requirements of
Subsections (A)(1) through (4) of this Rule or the bonding, net worth and
financial reporting requirements of Rules
6.07,
6.09, and
6.11 if the investment adviser has
custody solely because the investment adviser, investment adviser
representative, 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:
a. The beneficial owner of the
trust is a parent, a grandparent, a spouse, a sibling, a child, or a grandchild
of the adviser. These relationships shall include "step"
relationships.
b. For each account
under Subsection (B)(5) of this Rule, the investment adviser complies with the
following:
i. The investment adviser provides
a written statement to each beneficial owner of the account setting forth a
description of the requirements of Subsection (A) of this Rule and the reasons
why the investment adviser will not be complying with those
requirements.
ii. The investment
adviser obtains from each beneficial owner a signed and dated statement
acknowledging the receipt of the written statement required under Subsection
(B)(5)(i) of this Rule above.
iii.
The investment adviser maintains a copy of both documents described in
Subsections (B)(5)(i) and (ii) of this Rule above until the account is closed
or the investment adviser is no longer trustee.
6. Any adviser who intends to have custody of
client funds or securities but is not able to utilize a qualified custodian as
defined in Subsection (C)(3) of this Rule must first obtain approval from the
Division and must comply with all of the applicable safekeeping requirements
under Subsections (A)(1) through (4) of this Rule including taking
responsibility for those provisions that are designated to be performed by a
qualified custodian.
C.
Definitions. The following definitions apply for the purposes
of this Rule:
1.
Custody means
holding, directly or indirectly, client funds or securities or having any
authority to obtain possession of them or the ability to appropriate them.
Custody includes:
a. Possession of client
funds or securities unless received inadvertently and returned to the sender
promptly, but in any case within three (3) business days of receiving them and
the investment adviser maintains the records required by Rule
6.19(A)(22).
b. 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 three (3) business days of receipt and
the adviser maintains the records required under Rule
6.19(A)(22);
c. 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
d. 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.
Independent Representative
means a person who:
a. 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 (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 (2) years a material business relationship with the
investment adviser.
3.
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 (2) years:
a. A bank or savings association that has
deposits insured by the Federal Deposit Insurance Corporation under the Federal
Deposit Insurance Act;
b. A
registered broker-dealer holding the client assets in customer
accounts;
c. A registered futures
commission merchant register 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
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.
Miss. Code
Ann. §
75-71-411(f)
(2020).