Nebraska Administrative Code
Topic - BANKING AND FINANCE, DEPARTMENT OF
Title 48 - DEPARTMENT OF BANKING AND FINANCE
Chapter 7 - INVESTMENT ADVISERS
Section 48-7-012 - CUSTODY OF CLIENT FUNDS OR SECURITIES
Universal Citation: 48 NE Admin Rules and Regs ch 7 ยง 012
Current through March 20, 2024
012.01 Safekeeping required. It is unlawful and deemed to be a fraudulent, deceptive, or manipulative act, practice, or course of business for an investment adviser, registered or required to be registered, to have custody of client funds or securities unless:
012.01A Notice to
Director. The investment adviser notifies the Director promptly in writing that
the investment adviser has or may have custody. Such notification is required
to be given on Form ADV.
012.01B
Qualified Custodian. A qualified custodian maintains those funds and
securities:
012.01B1 In a separate account
for each client under that client's name; or
012.01B2 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, or, in the case of a pooled
investment vehicle that the investment adviser manages, in the name of the
pooled investment vehicle.
012.01C Notice to Clients. If an investment
adviser opens an account with a qualified custodian on its client's behalf,
under the client's name, under the name of the investment adviser as agent, or
under the name of a pooled investment vehicle, 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. If the
investment adviser sends account statements to a client to which the investment
adviser is required to provide this notice, the investment adviser must include
in the notification provided to that client and in any subsequent account
statement the investment adviser sends that client a statement urging the
client to compare the account statements from the custodian with those from the
investment adviser.
012.01D Account
Statements. The investment adviser has a reasonable basis, after due inquiry,
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.
012.01E Special Rule for
Limited Partnerships and Limited Liability Companies. If the investment adviser
or a related person is a general partner of a limited partnership, managing
member of a limited liability company, or holds a comparable position for
another type of pooled investment vehicle, the account statements required
under Section 012.01D, above, must be sent to each limited partner, member or
other beneficial owner.
012.01F
Independent Verification. The client funds and securities of which the
investment adviser has custody are verified by actual examination at least once
during each calendar year, by an independent certified public accountant,
pursuant to a written agreement between the investment adviser and the
independent certified public accountant, at a time that is chosen by the
independent certified public accountant without prior notice or announcement to
the investment adviser and that is irregular from year to year. The written
agreement must provide for the first examination to occur within six months of
becoming subject to this paragraph, except that, if the investment adviser
maintains client funds or securities pursuant to this Rule as a qualified
custodian, the agreement must provide for the first examination to occur no
later than six months after obtaining the internal control report. The written
agreement must require the independent certified public accountant to:
012.01F1 File a certificate on Form ADV-E
with the Director within one hundred twenty days of the time chosen by the
independent certified public accountant to verify client funds and securities,
stating that it has examined the funds and securities and describing the nature
and extent of the examination.
012.01F2 Notify the Director within one
business day of the finding of any material discrepancies during the course of
the examination, by means of a facsimile transmission or electronic mail,
followed by first class mail or overnight delivery, directed to the attention
of the Director; and
012.01F3 File
within four business days of the resignation or dismissal from, or other
termination of, the engagement, or removing itself or being removed from
consideration for being reappointed, Form ADV-E accompanied by a statement that
includes:
012.01F3a The date of such
resignation, dismissal, removal, or other termination, and the name, address,
and contact information of the independent certified public accountant;
and
012.01F3b An explanation of any
problems relating to examination scope or procedure that contributed to such
resignation, dismissal, removal, or other termination.
012.01G Investment Advisers Acting
as Qualified Custodians. If the investment adviser maintains, or if the
investment adviser has custody because a related person maintains, client funds
or securities pursuant to this Rule as a qualified custodian in connection with
advisory services the investment adviser provides to clients:
012.01G1 The independent certified public
accountant that the investment adviser retains to perform the independent
verification required by Section
012.01F, above,
must be subject to regulation by the Public Company Accounting Oversight Board
("PCAOB") or the Nebraska Board of Public Accountancy ("NBPA"), in accordance
with applicable rules; and
012.01G2 The investment adviser must obtain,
or receive from its related person, within six months of becoming subject to
this paragraph and thereafter no less frequently than once each calendar year,
a written internal control report prepared by an independent certified public
accountant.
012.01G2a The internal control
report must include an opinion of an independent certified public accountant as
to whether controls have been placed in operation as of a specific date, and
are suitably designed and are operating effectively to meet control objectives
relating to custodial services, including the safeguarding of funds and
securities held by either the investment adviser or a related person on behalf
of the investment adviser's clients, during the year;
012.01G2b The independent certified public
accountant must verify that the funds and securities are reconciled to a
custodian other than the investment adviser or the investment adviser's related
person; and
012.01G2c The
independent certified public accountant must be subject to regulation by PCAOB
or NBPA in accordance with applicable rules.
012.01H Independent Representatives. A client
may designate an independent representative to receive, on his or her behalf,
notices and account statements as required under Sections
012.01C and
012.01D,
above.
012.02 Exceptions.
012.02A 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 ("mutual fund"), the investment adviser may
use the transfer agent for the mutual fund in lieu of a qualified custodian for
purposes of complying with Section
012.01, above;
012.02B Certain Privately Offered Securities.
012.02B1 The investment adviser is not
required to comply with Section
012.01B, above,
with respect to securities that are:
012.02B1a
Acquired from the issuer in a transaction or chain of transactions not
involving any public offering;
012.02B1b Uncertificated and ownership
thereof is recorded only on the books of the issuer or its transfer agent in
the name of the client; and
012.02B1c Transferable only with prior
consent of the issuer or holders of the outstanding securities of the
issuer.
012.02B2
Notwithstanding Section
012.02B1, above,
the provisions of this Section are available with respect to securities held
for the account of a limited partnership, limited liability company, or other
type of pooled investment vehicle only if the limited partnership, limited
liability company, or other pooled investment vehicle is audited, and the
audited financial statements are distributed, as described in Section
012.02D, below, and
the investment adviser notifies the Director in writing that the investment
adviser intends to provide audited financial statements, as described above.
Such notification is required to be provided on Form ADV.
012.02C Fee Deduction. Notwithstanding
Section
012.01F, above, an
investment adviser is not required to obtain an independent verification of
client funds and securities maintained by a qualified custodian if all of the
following are met:
012.02C1 The investment
adviser has custody of the funds and securities solely as a consequence of its
authority to make withdrawals from client accounts to pay its advisory
fee;
012.02C2 The investment
adviser has written authorization from the client to deduct advisory fees from
the account held with the qualified custodian;
012.02C3 Each time a fee is directly deducted
from a client account, the investment adviser concurrently sends:
012.02C3a The qualified custodian an invoice
or statement of the amount of the fee to be deducted from the client's account;
and
012.02C3b The client an invoice
or statement 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.
012.02C4 The investment adviser notifies the
Director in writing that the investment adviser intends to use the safeguards
provided above. Such notification is required to be given on Form
ADV.
012.02D Limited
Partnerships, Limited Liability Companies, and other Pooled Investment Vehicles
Subject to Annual Audit. An investment adviser is not required to comply with
Sections
012.01C and
012.01D, above, and
shall be deemed to have complied with Section
012.0.1F, above,
with respect to the account of a limited partnership, limited liability
company, or another type of pooled investment vehicle if the following
conditions are met:
012.02D1 The investment
adviser sends to all limited partners, members or other beneficial owners at
least quarterly, a statement showing:
012.02D1a The total amount of all additions
to and withdrawals from the fund as a whole as well as the opening and closing
value of the fund at the end of the quarter based on the custodian's
records;
012.02D1b A listing of all
long and short positions on the closing date of the statement in accordance
with FASB Rule ASC 946-210-50; and
012.02D1c The total amount of additions to
and withdrawals from the fund by the investor as well as the total value of the
investor's interest in the fund at the end of the quarter.
012.02D2 At least annually, the
fund is subject to an audit and distributes its audited financial statements
prepared in accordance with generally accepted accounting principles to all
limited partners, members or other beneficial owners within one hundred twenty
days of the end of its fiscal year;
012.02D3 The audit is performed by an
independent certified public accountant that, at the time of the audit, is
subject to regulation by PCAOB or NBPA in accordance with applicable rules;
012.02D4 Upon liquidation, the
investment adviser distributes the fund's final audited financial statements
prepared in accordance with generally accepted accounting principles to all
limited partners, members or other beneficial owners, and the Director promptly
after the completion of such audit;
012.02D5 The written agreement with the
independent certified public accountant must require the independent certified
public accountant, upon resignation or dismissal from, or other termination of,
the engagement, or upon removing itself or being removed from consideration for
being reappointed, to notify the Director within four business days accompanied
by a statement that includes:
012.02D5a The
date of such resignation, dismissal, removal, or other termination, and the
name, address, and contact information of the independent certified public
accountant; and
012.02D5b An
explanation of any problems relating to audit scope or procedure that
contributed to such resignation, dismissal, removal, or other termination.
012.02D6 The investment
adviser must also notify the Director in writing that the investment adviser
intends to employ the use of the statement delivery and audit safeguards
described above. Such notification is required to be given on Form
ADV.
012.02E 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.
012.03 Delivery to Related Persons. Sending an account statement under Section 012.01E, above, or distributing audited financial statements under Section 012.02D, above, does not satisfy the requirements of this Rule if such account statements or financial statements are sent solely to limited partners, members or other beneficial owners that themselves are limited partnerships, limited liability companies, or another type of pooled investment vehicle and are related persons of the investment adviser.
012.04 Definitions. For purposes of this Rule:
012.04A 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. For purposes of determining
control:
012.04A1 Each of the investment
adviser's officers, partners, or directors exercising executive responsibility,
or persons having similar status or functions, is presumed to control the
investment adviser;
012.04A2 A
person is presumed to control a corporation if the person:
012.04A2a Directly or indirectly has the
right to vote twenty five percent or more of a class of the corporation's
voting securities; or
012.04A2b Has
the power to sell or direct the sale of twenty five percent or more of a class
of the corporation's voting securities;
012.04A3 A person is presumed to control a
partnership if the person has the right to receive upon dissolution, or has
contributed, twenty five percent or more of the capital of the
partnership;
012.04A4 A person is
presumed to control a limited liability company if the person:
012.04A4a Directly or indirectly has the
right to vote twenty five percent or more of a class of the interests of the
limited liability company;
012.04A4b Has the right to receive upon
dissolution, or has contributed, twenty five percent or more of the capital of
the limited liability company;
012.04A4c Is an elected manager of the
limited liability company; or
012.04A5 A person is presumed to control a
trust if the person is a trustee or managing agent of the trust.
012.04B Custody means holding
directly or indirectly, client funds or securities, or having any authority to
obtain possession of or the ability to appropriate client funds or securities.
The investment adviser 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 adviser
provides to clients.
012.04B1 Custody
includes:
012.04B1a Possession of client funds
or securities unless the investment adviser receives them inadvertently and
returns them to the sender within three business days of receiving
them;
012.04B1b 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
012.04B1c 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,
its supervised person, or investment adviser representative, legal ownership of
or access to client funds or securities.
012.04B2 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 adviser maintains the records required under 48 NAC
10.002.22.
012.04C
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) ).
012.04D Independent representative means a
person who:
012.04D1 Acts as agent for an
advisory client, including in the case of a pooled investment vehicle, for
limited partners or 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;
012.04D2 Does not control, is not
controlled by, and is not under common control with the investment adviser; and
012.04D3 Does not have, and has
not had within the past two years, a material business relationship with the
investment adviser.
012.04E Qualified custodian means the
following:
012.04E1 A bank or savings
association that has deposits insured by the Federal Deposit Insurance
Corporation under the Federal Deposit Insurance Act;
012.04E2 A broker-dealer registered in this
jurisdiction and with the Securities and Exchange Commission holding the client
assets in customer accounts;
012.04E3 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
012.04E4 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.
012.04E5 An investment adviser who
has custody of the funds and securities solely as a consequence of its
authority to make withdrawals from client accounts to pay its advisory fee is
not a qualified custodian.
012.04F Related person means any person,
directly or indirectly, controlling or controlled by the investment adviser,
and any person that is under common control with the investment
adviser.
Disclaimer: These regulations may not be the most recent version. Nebraska 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.
