Current through Register Vol. 54, No. 12, March 23, 2024
(a)
Safekeeping required. It
is unlawful and considered to be a fraudulent, deceptive or manipulative act,
practice or course of business, within the meaning of section 404 of the act
(70
P.S. §
1-404), for an investment
adviser, registered or required to be registered under section 301 of the act
(70
P.S. §
1-301), to have custody of client
funds or securities unless:
(1) The investment
adviser notifies the Department promptly in writing on Form ADV that the
investment adviser has or may have custody.
(2) A qualified custodian maintains those
funds and securities in one of the following:
(i) A separate account for each client under
that client's name.
(ii) 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.
(3) The investment adviser meets the
following conditions:
(i) If the 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 shall
notify the client in writing of the qualified custodian's name, address and how
the funds or securities are maintained, promptly when the account is opened and
following any changes to this information.
(ii) If the investment adviser sends account
statements to a client to which the investment adviser is required to provide
the notice in subparagraph (i), the investment adviser shall 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.
(4)
The investment adviser meets the following conditions:
(i) 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 and the account statement:
(A) Identifies the amount of funds in the
account.
(B) Identifies the amount
of each security in the account at the end of the period.
(C) Sets forth all transactions in the
account during that period.
(ii) If the investment adviser or a related
person 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 paragraph (3)
shall be sent to each limited partner (or member or other beneficial
owner).
(5) The
investment adviser meets the following conditions:
(i) 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,
under 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 previous notice or announcement to the
investment adviser and that is irregular from year to year.
(ii) The written agreement provides for the
first examination to occur within 6 months of becoming subject to this
paragraph, except that, if the investment adviser maintains client funds or
securities under this section as a qualified custodian, the agreement must
provide for the first examination to occur no later than 6 months after
obtaining the internal control report.
(iii) The written agreement must require the
independent certified public accountant to:
(A) File a certificate on Form ADV-E with the
Department within 120 days of the time chosen by the independent certified
public accountant in this paragraph, stating that it has examined the funds and
securities and describing the nature and extent of the examination.
(B) Notify the Department within 1 business
day of the finding, by means of a facsimile transmission or e-mail, followed by
first class mail, directed to the attention of the Department on finding any
material discrepancies during the course of the examination.
(C) File Form ADV-E within 4 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,
accompanied by a statement that includes:
(I)
The date of resignation, dismissal, removal or other termination, and the name,
address and contact information of the independent certified public
accountant.
(II) An explanation of
any problems relating to examination scope or procedure that contributed to
resignation, dismissal, removal or other termination.
(6) If the investment
adviser has custody because a related person maintains client funds or
securities under this section as a qualified custodian in connection with
advisory services the investment adviser provides to clients, the investment
adviser shall obtain, or receive from its related person, within 6 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 that performs the independent verification required
under paragraph (5) that complies with the following:
(i) 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.
(ii) The
independent certified public accountant shall verify that the funds and
securities are reconciled to a custodian other than the investment adviser or
the investment adviser's related person.
(7) A client may designate an independent
representative to receive, on his behalf, notices and account statements as
required under paragraphs (3) and (4).
(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.A. §
80a-5(a)(1)) (mutual
fund), the investment adviser may use the mutual fund's transfer agent instead
of a qualified custodian to comply with subsection (a).
(2)
Certain privately offered
securities.
(i) The investment
adviser does not need to comply with subsection (a)(2) 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 is recorded only on the books of the issuer or its transfer agent in
the name of the client.
(C)
Transferable only with previous consent of the issuer or holders of the
outstanding securities of the issuer.
(ii) Notwithstanding subparagraph (i), the
provisions of this paragraph are available with respect to securities held for
the account of a pooled investment vehicle only if the pooled investment
vehicle is audited, and the audited financial statements are distributed, in
accordance with §
303.042(a)(3)(ii)
(relating to investment adviser capital requirements) and the investment
adviser notifies the Department in writing on Form ADV that the investment
adviser intends to provide audited financial statements, as described in this
subparagraph.
(3)
Fee deduction. Notwithstanding subsection (a)(5), an
investment adviser does not need to obtain an independent verification of
client funds and securities maintained by a qualified custodian if the
investment adviser is in compliance with § 303.042(a)(3)(i).
(4)
Limited partnerships subject to
annual audit. An investment adviser does not need to comply with
subsection (a)(3) and (4) and will be considered to have complied with
subsection (a)(5) with respect to the account of a pooled investment vehicle
that is subject to audit and is in compliance with §
303.042(a)(3)(ii).
(5)
Registered investment companies. The investment adviser does
not need to comply with this section with respect to the account of an
investment company registered under the Investment Company Act of 1940
(15 U.S.C.A. §§
80a-1-80
a-64).
(c)
Delivery to related persons. Sending an account statement
under subsection (a)(4) or distributing audited financial statements under
subsection (b)(4) does not satisfy the requirements of this section if the
account statements or financial statements are sent solely to limited partners
(or members or other beneficial owners) that themselves are limited
partnerships (or limited liability companies, or another type of pooled
investment vehicle) and are related persons of the investment
adviser.
(d)
Department
authority. An investment adviser who cannot comply with one or more of
the specific provisions in this section may request that the Department waive
the specific provisions if the investment adviser can establish that undue
hardship would be placed on the investment adviser and that investment adviser
can establish sufficient alternative safeguards.
The provisions of this §
404.014 issued under section 202.C
of the Department of Banking and Securities Code (71 P.S. §
733-202.C); section 609(a) of the
Pennsylvania Securities Act of 1972 (70 P.S. §
1-609(a)); and section 9(b)
of the Takeover Disclosure Law (70 P.S. §
79(b)).
This section cited in 10 Pa. Code §
102.021 (relating to definitions);
and 10 Pa. Code §
305.019 (relating to dishonest and
unethical practices).