SEC provides additional clarification for Custody Rule
In a September 30, 2007 no-action letter addressed to the Investment Adviser’s Association, the SEC carved out two additional safe harbors for investment advisers who ‘inadvertently” receive client assets from third parties, specifically for:
- tax refunds
- class action settlements, and
- stock certificates or dividendsThe SEC provided relief of enforcement of Rule 206(4) of the Investment Adviser’s Act, provided the Investment Adviser had written policies and procedures in place to:(1) appropriately identify the assets as well as the clients clients for whom the assets were sent, (2) promptly forward client
assets to the client or a qualified custodian within five days of reciept; (3) promptly return uidentified assets to the third party; and (4) maintain appropriate records of the reciept and delivery of client assets.
This is a welcome development that provides investment advisers with a reasonable cushion to act with their client’s best interest. With respect to class actions, there has always been confusion as to whether it is the adviser or the custodian’s responsibility to file and distribute the claim. This recent SEC pronouncement acknowleges that some advisers have taken their clients interests to heart and should not be penalized for it.