Rules & Regulations of the State of Tennessee
Title 0780 - Commerce and Insurance
Subtitle 0780-04 - Division of Securities
Chapter 0780-04-03 - Industry Regulation
Section 0780-04-03-.07 - INVESTMENT ADVISER CUSTODY OR POSSESSION OF FUNDS OR SECURITIES OF CLIENTS

Universal Citation: TN Comp Rules and Regs 0780-04-03-.07

Current through September 24, 2024

(1) It shall constitute an act, practice, or course of business which operates or would operate as a fraud or deceit upon another person, within the meaning of T.C.A. § 48-1-121(b)(3) of the Act, for any investment adviser in this state who has custody or possession of any funds or securities in which any client has any beneficial interest, to commit an act or take any action, directly or indirectly, with respect to any funds or securities, unless:

(a) All such securities of each such client are segregated, marked to identify the particular client who has the beneficial interest therein, and held in safekeeping in some place reasonably free from risk of destruction or other loss;

(b)
1. All such funds of such clients are deposited in one (1) or more bank accounts which contain only clients' funds;

2. Such account or accounts are maintained in the name of the investment adviser as agent or trustee for such clients; and

3. The investment adviser maintains a separate record for each such account which shows:
(i) The name and address of the bank where such account is maintained;

(ii) The dates and amounts of deposits in and withdrawals from such account; and

(iii) The exact amount of each client's beneficial interest in such account;

(c) Such investment adviser, immediately after accepting custody or possession of such funds or securities from any client, notifies such client in writing of the place and manner in which such funds and securities will be maintained, and thereafter, if and when there is any change in the place or manner in which such funds or securities are being maintained, gives each such client written notice thereof;

(d) Such investment adviser sends to each client, not less frequently than once every three (3) months, an itemized statement showing the funds and securities in the custody or possession of the investment adviser at the end of such period, and all debits, credits, and transactions in such client's account during such period;

(e) Such investment adviser complies with the reporting requirements set forth under part (4)(a)2. of Rule 0780-04-03-.02; and

(f) All such funds and securities of clients are verified by actual examination at least once during each calendar year by an independent public accountant at a time that shall be chosen by such accountant without prior notice to the investment adviser. A certificate of such accountant stating that an examination of such funds and securities has been made, and describing the nature and extent of the examination, shall be attached to a completed Form ADV-E and transmitted to the Division promptly after each examination, unless the investment adviser is not registered with the Division pursuant to T.C.A. § 48-1-109(c)(2).

(2) This Rule shall not apply to an investment adviser also registered as a broker-dealer under Section 15 of the 1934 Act if (a) such broker-dealer is subject to and in compliance with SEC Rule 15c3-1 ( 17 C.F.R. §240.15c3 - 1) or (b) such broker-dealer is a member of an exchange whose members are exempt from SEC Rule 15c3-1 under the provisions of paragraph (b)(2) thereof, and such broker-dealer is in compliance with all rules and settlement practices of such exchange imposing requirements with respect to financial responsibility and the segregation of funds or securities carried for the account of customers.

(3) An investment adviser registered in this state whose principal place of business is located outside this state shall not be subject to the record maintenance requirement of part (1)(b)3. of this Rule if such investment adviser:

(a) Is registered as an investment adviser in the state in which the principal place of business of the investment adviser is located;

(b) Is in compliance with the books and records requirements of the state in which the investment adviser maintains its principal place of business; and

(c) The provisions of part (1)(b)3. of this Rule would require the investment adviser to maintain books or records in addition to those required under the laws of the state in which the investment adviser maintains its principal place of business.

(4) An investment adviser in this state that fully complies with the conditions set forth under subparagraphs (1)(a-f) of this Rule may take or have custody of any funds or securities of any client.

(5) Any investment adviser that is not registered with the Division under T.C.A. § 48-1-109(c)(2) that fully complies with SEC Rule 206(4)-2 ( 17 C.F.R. §275.206(4)-2) may take or have custody of any funds or securities of any client.

(6) As used herein "principal place of business" of an investment adviser means the executive office of the investment adviser from which the officers, partners, or managers of the investment adviser direct, control, and coordinate the activities of the investment adviser.

Authority: T.C.A. §§ 48-1-109, 48-1-111, 48-1-115, 48-1-116, 48-1-121, Public Acts 1997, Chapter 164, §7, §222 of the Investment Advisers Act of 1940, as amended by §304 of the National Securities Markets Improvement Act of 1996, §15 of the Securities Exchange Act of 1934, 17 C.F.R. §240.15c3 - 1, and 17 C.F.R. §275.206(4)-2.

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