Study guide
13.4 Custody Requirements
Series 65 Uniform Investment Adviser Law
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1 Introduction
About the Series 65 How to Use This Guide
2 Chapter 1: Economic Factors & Business Cycles
1.1 Business Cycles 1.2 Monetary Policy 1.3 Fiscal Policy 1.4 Inflation & Deflation 1.5 Interest Rates & Yield Curves 1.6 Global Economic Factors
3 Chapter 2: Financial Reporting & Analytical Methods
2.1 Financial Statements Overview 2.2 Accounting Fundamentals 2.3 SEC Filings & Annual Reports 2.4 Financial Ratios 2.5 Time Value of Money 2.6 IRR and NPV 2.7 Descriptive Statistics
4 Chapter 3: Types of Risk
3.1 Systematic (Market) Risk 3.2 Unsystematic (Company-Specific) Risk 3.3 Interest Rate & Reinvestment Risk 3.4 Inflation & Currency Risk 3.5 Liquidity Risk & Opportunity Cost 3.6 Risk Measurement & Portfolio Theory
5 Chapter 4: Cash Equivalents & Fixed Income Securities
4.1 Cash & Cash Equivalents 4.2 Treasury Securities 4.3 Agency Securities 4.4 Corporate Bonds 4.5 Municipal Bonds 4.6 Bond Pricing & Yields
6 Chapter 5: Equity Securities
5.1 Common Stock 5.2 Preferred Stock 5.3 Shareholder Rights & Corporate Actions 5.4 Equity Valuation Methods 5.5 ADRs, REITs & Other Equity Securities
7 Chapter 6: Pooled Investments
6.1 Mutual Funds 6.2 Mutual Fund Costs & Fees 6.3 Exchange-Traded Funds (ETFs) 6.4 Closed-End Funds & UITs 6.5 Hedge Funds & Private Equity
8 Chapter 7: Derivatives, Alternative Investments & Insurance Products
7.1 Options Basics 7.2 Options Strategies 7.3 Alternative Investments 7.4 Annuities 7.5 Life Insurance Products
9 Chapter 8: Client Types & Profiles
8.1 Individual Clients 8.2 Business Entity Clients 8.3 Trusts & Estates 8.4 Accredited & Qualified Investors 8.5 Suitability & Know Your Customer
10 Chapter 9: Portfolio Theory & Capital Markets
9.1 Modern Portfolio Theory 9.2 Capital Asset Pricing Model (CAPM) 9.3 Efficient Market Hypothesis 9.4 Risk & Performance Measures 9.5 Asset Allocation
11 Chapter 10: Portfolio Management Strategies
10.1 Investment Styles 10.2 Portfolio Management Techniques 10.3 Fixed Income Strategies 10.4 Return Calculations
12 Chapter 11: Tax Considerations & Retirement Planning
11.1 Capital Gains & Investment Taxes 11.2 Retirement Plans Overview 11.3 Individual Retirement Accounts (IRAs) 11.4 Education Savings Plans 11.5 Distributions & RMDs
13 Chapter 12: ERISA, Special Accounts & Performance Measures
12.1 ERISA Requirements 12.2 Special Account Types 12.3 Performance Measures & Reporting 12.4 QDROs & Special Situations
14 Chapter 13: Regulation of Investment Advisers
13.1 Investment Advisers Act of 1940 13.2 Registration Requirements 13.3 Recordkeeping Requirements 13.4 Custody Requirements 13.5 Exempt Reporting Advisers
15 Chapter 14: Regulation of Investment Adviser Representatives
14.1 IAR Definition & Requirements 14.2 Registration & Post-Registration 14.3 IARs of Federal Covered Advisers
16 Chapter 15: Regulation of Broker-Dealers & Agents
15.1 Broker-Dealer Definition 15.2 Agent Registration 15.3 Regulation Best Interest
17 Chapter 16: Securities Registration & Exemptions
16.1 Uniform Securities Act 16.2 Securities Registration Methods 16.3 Exempt Securities 16.4 Exempt Transactions
18 Chapter 17: Communications & Client Relationships
17.1 Advertising Rules 17.2 Social Media & Electronic Communications 17.3 Client Agreements & Disclosure 17.4 Proxy Voting & Other Obligations
19 Chapter 18: Ethics & Fiduciary Obligations
18.1 Fiduciary Duties 18.2 Prohibited Practices 18.3 Senior & Vulnerable Adult Protection 18.4 AML & Compliance Programs
13.4 Custody Requirements
Key Takeaways Explain This Topic AI
Custody includes possession, authority to obtain possession, or fee deduction authority.
Client assets must be held by a qualified custodian.
Annual surprise exams are required unless an exception applies.
Fee deduction custody requires direct custodian statements to clients.
State net capital minimums are $35,000 for custody and $10,000 for discretion only.
Last updated: October 2026
The custody rule (SEC Rule 206(4)-2) imposes significant requirements on investment advisers who hold or have access to client assets. These protections help prevent theft and misappropriation.
What Constitutes Custody
An adviser is deemed to have custody of client assets if:
- Situation Example
- Direct Possession Physically holds client funds or securities
- Authority to Obtain Possession Can withdraw from client's account
- Fee Deduction Authority Can deduct fees directly from client accounts
- Related Person as Custodian Related party holds client assets
- Trustee/General Partner Acts in fiduciary capacity with asset control
- Fee Deduction = Custody
Having the authority to deduct advisory fees directly from client accounts is a form of custody because the adviser can access client funds. This is sometimes called "constructive custody."
On the Exam: Many questions test whether specific situations create custody. Remember that fee deduction authority alone creates custody.
Qualified Custodian Requirement
Client assets must be held by a qualified custodian :
- Qualified Custodian Types Examples
- Banks Commercial banks, savings associations
- Broker-Dealers SEC-registered broker-dealers
- Futures Commission Merchants For certain commodities-related assets
- Foreign Financial Institutions Under certain conditions
- Qualified Custodian Obligations
- Requirement Details
- Separate Accounts Maintain client assets separately from firm assets
- Account Name In client's name OR adviser's name as agent/trustee
- Quarterly Statements Send directly to clients (not through adviser)
- Surprise Examination Requirement
Advisers with custody (with limited exceptions) must undergo an annual surprise examination :
Requirement Details
Examiner Independent public accountant (it must also be PCAOB-registered and inspected if the adviser or a related person is the qualified custodian)
- Timing At least once per calendar year
- Notice "Surprise"—no advance notice to adviser
- Irregular Timing Varies from year to year
- Verification Actual examination of client funds and securities
- Report Accountant files Form ADV-E with the SEC within 120 days of the examination date it chose
- Exceptions to Surprise Examination
- Exception Conditions
- Fee Deduction Only Custody solely due to fee deduction authority
- Pooled Investment Vehicles Subject to annual audit with statements distributed to investors
- Operationally Independent Custodian Related custodian operates independently
- Fee Deduction Safeguards: SEC vs. State Rule
Under the SEC rule, an adviser whose custody arises solely from its authority to deduct advisory fees does not need the surprise examination; the qualified custodian still sends quarterly statements. The NASAA model custody rule for state-registered advisers adds conditions:
- Requirement (NASAA model rule) Details
- Written Authorization Client authorizes fee deduction from the account at the qualified custodian in writing
Invoice to Custodian Each time a fee is deducted, the adviser concurrently sends the custodian the amount to be deducted
Invoice to Client At the same time, the adviser sends the client an itemized invoice (fee formula, assets the fee is based on, period covered)
- Notice The adviser tells the Administrator on Form ADV that it uses these safeguards
- Net Capital and Bonding Requirements
- State-Registered Advisers
- Custody Status Net Capital/Bonding Requirement
- Has Custody $35,000 minimum net worth (or surety bond)
- Discretionary Authority Only $10,000 minimum net worth (or surety bond)
- Advisory Only Positive net worth (varies by state)
- Surety Bond Alternative
- Situation Requirement
- Net Worth Shortfall Post bond equal to shortfall, rounded up to nearest $5,000
- Bond Amount Must cover the deficit amount
- State Variations Some states require higher amounts (e.g., Alabama requires $50,000)
- Client Notification Requirements
Advisers must inform clients about custody arrangements:
- Notification Content
- Custodian Identity Where assets are held
- Account Information Account numbers and how to access
- Statement Rights Right to receive custodian statements
- Verification How to verify holdings independently
- Internal Controls for Custody
- Control Purpose
- Segregation of Duties Separate authorization and custody functions
- Dual Control Multiple persons required for transactions
- Reconciliation Regular comparison of records to custodian
- Written Procedures Document all custody-related processes
- Key Takeaways
- Custody includes direct possession, authority to obtain possession, and fee deduction authority
- Client assets must be held by a qualified custodian (bank, broker-dealer, FCM)
- Annual surprise examination required unless exception applies
- Fee deduction exception requires direct custodian statements to clients
- State net capital: $35,000 for custody, $10,000 for discretion only