Apply Custody And Discretion Rules - Series 65

1. What is the general client asset handling rule for advisers regarding commingling?

   Client assets must not be commingled with the adviser's assets. Anti-commingling rules prevent advisers from mixing funds, safeguarding client assets and avoiding conflicts of interest.

2. What is "authority" that creates custody even without physical possession?

   Any ability to withdraw, transfer, or dispose of client assets. Authority triggers custody to mitigate risks of unauthorized transactions, even absent physical holding of assets.

3. What is "limited power of attorney" in an advisory context (scope-level definition)?

   Authority to trade only, not to withdraw or transfer client assets. Limited power of attorney restricts actions to trading, preventing custody by excluding asset withdrawal capabilities.

4. What is "discretionary authority" for an investment adviser?

   Authority to decide the security, amount, or timing without prior approval. Discretion allows efficient portfolio management by enabling decisions without constant client input, per advisory agreements.

5. What is the standard account statement requirement under the custody rule?

   Custodian sends account statements to clients at least quarterly. Quarterly statements from custodians provide independent verification, helping clients monitor assets and detect discrepancies.

6. What is "custody" for an investment adviser under Rule $206(4)-2$ (high-level definition)?

   Holding client funds/securities or having authority to obtain them. Custody exists to prevent misuse, encompassing any scenario where advisers can access or control client assets directly or indirectly.

7. Identify whether having a client's signed stock certificates in the adviser's office is custody.

   Yes, it is custody due to physical possession. Physical possession of securities like stock certificates grants direct control, necessitating custody safeguards under Rule 206(4)-2.

8. If an adviser sends its own statements, what additional custody safeguard is generally required?

   Annual surprise examination by an independent public accountant. Surprise exams add oversight when advisers issue statements, verifying asset integrity to prevent fraud.

9. Identify whether an adviser may place a trade without prior client consent when discretion is authorized.

   Yes, if written discretionary authority is in place. Authorized discretion permits independent trading to align with client goals without needing approval for each transaction.

10. What client authorization is generally required before an adviser exercises discretion?

    Prior written discretionary authorization from the client. Written authorization ensures client consent and regulatory compliance before advisers exercise investment discretion.

11. What is the core custody rule requirement for client assets when an adviser has custody?

    Maintain assets with a qualified custodian. Using qualified custodians protects client assets by separating them from the adviser, reducing risks of fraud or misuse.

12. What is the SEC custody rule number that defines "custody" for advisers?

    Rule $206(4)-2$ under the Advisers Act of 1940. This rule mandates safeguards to protect client assets when advisers have custody, ensuring transparency and independent oversight.

13. What notice must an adviser provide when client assets are held at a qualified custodian?

    Written notice of custodian identity, address, and how assets are held. The notice ensures clients are informed about asset safekeeping, promoting transparency under the custody rule.

14. What is "possession" of client cash or securities for custody purposes?

    Physical holding of client funds or securities by the adviser. Possession implies direct control, triggering custody rules to safeguard against potential loss or misappropriation by the adviser.

15. Identify whether trading authority alone (discretionary trading) automatically creates custody.

    No, trading authority alone does not create custody. Trading authority focuses on investment decisions without asset access, distinguishing it from custody triggers.

16. What is "qualified custodian" under the custody rule (general description)?

    Bank, broker-dealer, futures commission merchant, or similar. Qualified custodians provide independent safekeeping, ensuring client assets are held securely outside the adviser's direct control.

17. What is a "surprise examination" under the custody rule (purpose-level description)?

    Independent verification of client funds and securities. The examination confirms asset existence and proper handling through unannounced audits, enhancing client protection.

18. Identify whether an adviser with authority to wire client funds to a third party has custody.

    Yes, it is custody due to withdrawal authority to a third party. Authority to transfer to third parties enables potential misuse, classifying it as custody requiring safeguards.

19. Identify whether an adviser with the ability to move client assets between same-name accounts has custody.

    No, not custody if transfers are limited to same-name accounts. Limited transfers between same-name accounts do not grant broader access, thus avoiding custody under Rule 206(4)-2.

20. Identify whether serving as trustee of a client trust generally creates custody.

    Yes, trustee authority generally creates custody. Trustee roles grant legal control over assets, invoking custody rules to protect beneficiaries from potential conflicts.

21. What is the difference between custody and discretion (one-sentence distinction)?

    Custody is access to assets; discretion is authority to make trading decisions. This distinction ensures advisers understand that discretion involves decision-making, while custody pertains to asset control risks.

22. Identify whether having a client's check made payable to the custodian is custody if forwarded promptly.

    No, not custody if forwarded to the custodian promptly. Prompt forwarding to the custodian avoids possession, preventing custody classification and associated regulatory requirements.

23. What is the general time limit to forward client checks to the custodian to avoid custody?

    Within $3$ business days. The three-day limit ensures minimal adviser control over funds, aligning with rules to prevent unintended custody.

24. Identify whether a check made payable to the adviser (not the custodian) creates custody.

    Yes, it creates custody. Checks payable to the adviser constitute possession, invoking custody rules due to potential access to client funds.

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