Author: Ashley Hatt

In 2009, the SEC subjected advisors to a new list of Custody Rule requirements that sent the world of Registered Investment Advisors into a tailspin as they raced to understand the changes, how they affected their firm and how they could comply by the deadline. More than a decade and several additional guidance from the SEC later and the Custody Rule is a topic many advisors still have questions about. This article will answer some of the most common questions we hear from advisors regarding custody including:

  • How exactly does the SEC define custody?
  • How do advisors know if they have custody?
  • If advisors do have custody, what they should do about it?
  • What situations provide advisors with exemptions to the Custody Rule?

Let’s start with how the SEC defines custody. In its Investor Bulletin, posted March 1st of 2013[1], the SEC defined custody by investment advisors as “holding client funds or securities, directly or indirectly, or having the authority to obtain possession of them.” Based on that definition, an adviser that uses a qualified custodian and does not hold the securities themselves can still be deemed to have custody based on the latter part of the definition.

A few common custody situations that we see firms inadvertently stumble into include:

  • Where, in an effort to provide a high level of service, advisers maintain their client’s passwords and are therefore able to log in as the client and transfer or withdrawal funds or securities, e.g. the adviser provides fee payment services or the adviser has a password to its client’s account that it uses to pay the client’s estimated taxes;
  • Where the adviser or an employee of the firm serves as trustee or executor to a client and the there is no family or personal relationship with the grantor, beneficiary, or the deceased;
  • Where the adviser acts as investment manager to a private fund and the adviser or a related entity also serves as the general partner, managing member, or a comparable position for the pooled investment vehicle;
  • Where the adviser the authority to instruct the custodian to move money with standing letters of authorization (SLOAs) and the money undergoes a change of ownership during the transfer. These changes in ownership can be as simple as a transfer from a client’s individual brokerage account to revocable trust, IRA to a joint account, or individual account to a business entity, such as a business or school.

What is required if your firm conducts an activity that deems custody under the Custody Rule? According to the SEC[2], there are five main criteria that Advisors are required to meet if they are deemed to have custody which are:

  1. a requirement to hold assets with a qualified custodian,
  2. if the investment adviser opens the account, they must notify the client of the qualified custodian’s name in writing, so they are aware of where the assets are being held,
  3. sending at least quarterly itemized statements to their clients showing disbursements from the accounts as well the amount of the advisory fees calculated and deducted
  4. if the adviser is also acting as the custodian, the adviser must obtain a report from the qualified custodian which includes an annual internal control report from an independent public accountant. This report should speak to the adviser’s ability acting as the custodian to safeguard their client’s securities and assets,
  5. and finally, perhaps the most impactful change brought on by the custody rule for adviser’s deemed to have custody is the requirement for an expensive and time consuming annual surprise custody examination conducted by an independent public accountant registered with the Public Company Accounting Oversight Board.

It’s easy to see why custody is a confusing topic in our industry. In 2018, the SEC stated in the Evolution Revolution report[3] that “amendments to the custody rules for investment companies and investment advisors were added to the SEC’s Regulatory Flexibility Agenda in the Spring of 2018 as a long-term action.” This could mean that further changes and clarification are in the works but until the SEC gives further guidance it is important that advisors seek to understand the information surrounding the custody rule that has already been issued.

For questions about how the Custody Rule may affect your firm, contact Key Bridge Compliance, LLC at, or by sending us an email at to discuss your questions further.


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