Client Funds

An investment adviser that has custody of client funds or securities is generally subject to which requirement?

1. A.FDIC insurance on all client accountsWrong. Securities accounts are not FDIC-insured; that is a bank-deposit protection.
2. B.Registration as a broker-dealerWrong. Custody does not convert an adviser into a broker-dealer.
3. C.No additional requirements beyond ordinary recordkeepingWrong. Custody imposes heightened safeguards.
4. D.Use of a qualified custodian and a surprise annual examination by an independent accountantCorrect. These are core custody-rule safeguards.

Why: An adviser with custody must maintain client assets with a qualified custodian and is generally subject to a surprise annual examination by an independent public accountant, among other safeguards. Citation: Investment Advisers Act Rule 206(4)-2 (Custody Rule). Takeaway: custody = qualified custodian plus surprise exam.

Under NASAA model rules, an investment adviser that maintains custody of client funds or securities must generally...

1. A.Guarantee client assets against lossCustody rules protect assets through controls, not guarantees against market loss.
2. B.Do nothing beyond ordinary registrationCustody imposes extra safeguards beyond ordinary registration.
3. C.Maintain higher minimum net worth and undergo a surprise annual examCorrect — custody triggers the higher net worth and surprise examination requirements.
4. D.Only keep the assets in the adviser's own bank accountClient assets must be held by a qualified custodian, segregated from the adviser's funds.

Why: An adviser with custody must maintain a higher minimum net worth (35,000 dollars under the NASAA model rule), use a qualified custodian, provide account statements, and undergo a surprise annual examination by an independent accountant. An adviser with discretion but no custody faces a lower net worth requirement (10,000 dollars).