The staff (the “Staff”) of the SEC’s Division of Investment Management recently issued Questions II.11 and II.12 (“New FAQs”) to the “Staff Responses to Questions About the Custody Rule” to clarify when an investment adviser is considered to have “inadvertent custody” of client assets under Rule 206(4)-2 of the Investment Advisers Act of 1940 (the “Custody Rule”).1
The Staff previously stated that an adviser may have inadvertent custody of client assets as a result of provisions in a custodial agreement that permit the adviser to instruct the custodian to disburse or transfer client assets.2
In response to the New FAQs, the Staff stated that an adviser that does not have a copy of a client’s custodial agreement, and does not know, or have reason to know, whether the agreement would give the adviser inadvertent custody, does not need to comply with the Custody Rule, or indicate that it has custody in its Form ADV, with respect to that client’s account if inadvertent custody would be the only basis for custody. The Staff noted, however, that an adviser that recommended, requested or required a client’s custodian is not eligible for this relief.
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1 https://www.sec.gov/divisions/investment/custody_faq_030510.htm
2 IM Guidance Update “Inadvertent Custody: Advisory Contract Versus Custodial Contract Authority” (February 2017) https://www.sec.gov/investment/im-guidance-2017-01.pdf
