RIAs Must Make Certain They Haven’t Inadvertently Taken Custody of Clients’ Funds or Securities

The SEC has found that Registered Investment Advisers (“RIAs”) may not realize they have custody. Custody” is defined as “holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them.” When an RIA takes custody of a client’s funds or securities, the risk to that person increases dramatically. The Custody Rule, found in Rule 206(4)-2 under the Investment Advisers Act, was passed primarily to protect clients from unscrupulous investment advisers. Nonetheless, well-intentioned investment advisers may not realize that their actions may trigger the application of the Custody Rule.