3 Colo. Code Regs. § 704-1-51-4.10(IA)

Current through Register Vol. 47, No. 20, October 25, 2024

Section 3 CCR 704-1-51-4.10(IA) - Custody and Safekeeping Requirements

A. Definitions. For purposes of this section:

1. "Custody" means holding directly or indirectly, client funds or securities, or having any authority to obtain possession of them or has the ability to appropriate them.

a. Custody includes:

i. Any arrangement (including a general power of attorney) under which you are authorized or permitted to withdraw client funds or securities maintained with a custodian upon your instruction to the custodian; and

ii. Any capacity (such as general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle) that gives you or your supervised person legal ownership of or access to client funds or securities.

2. "Independent representative" means a certified public accountant or attorney who:

a. Acts as agent for an advisory client, including in the case of a pooled investment vehicle, for limited partners of a limited partnership, members of a limited liability company, or other beneficial owners of another type of pooled investment vehicle and by law or contract is obliged to act in the best interest of the advisory client or the limited partners, members, or other beneficial owners;

b. Is engaged by you to act as a gatekeeper for the payment of fees, expenses and capital withdrawals from the pooled investment;

c. Does not control, is not controlled by, and is not under common control with the investment adviser, investment adviser representative, or any related entity; and

d. Does not have, and has not had within the past two years, a material business relationship with the investment adviser, investment adviser representative, or any related entity.

3. "Qualified custodian" means the following independent institutions or entities that are not affiliated with the adviser by any direct or indirect common control and have not had a material business relationship with the adviser in the previous two years:

a. A bank or savings association that has deposits insured by the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act;

b. A licensed broker-dealer holding the client assets in customer accounts;

c. A registered futures commission merchant registered under Section 4f(a) of the Commodity Exchange Act, holding the client assets in customer accounts, but only with respect to clients' funds and security futures, or other securities incidental to transactions in contracts for the purchase or sale of a commodity for future delivery and options thereon; and

d. A foreign financial institution that customarily holds financial assets for its customers, provided that the foreign financial institution keeps the advisory clients' assets in customer accounts segregated from its proprietary assets.

B. No investment adviser or investment adviser representative, licensed or required to be licensed in this state shall take or maintain custody or possession of any funds or securities in which any client of such person has any beneficial interest unless:

1. The investment adviser or investment adviser representative complies with § 11-51-407(5)(a) -(f), or

2. If the investment adviser or investment adviser representative has custody as defined in Rule 51-4.10(IA).A.1 due solely by having fees directly deducted from the client accounts and complies and provides the following safeguard requirements:

a. Written Authorization. Investment advisers directly deducting fees must have written authorization from the client to deduct fees from the account held with the qualified custodian;

b. Notice of fee deduction. Each time a fee is charged directly to a client or directly deducted from a client account, the investment adviser must concurrently:

i. Send the qualified custodian an invoice specifying the amount of the fee to be deducted from the client's account; and

ii. Send the client an invoice specifying and itemizing the fee. Itemization includes the formula used to calculate the fee, the amount of assets under management or investment advisory services the fee is based on, the amount of time charged and the services provided for hourly billing, and the time period covered by the fee;

c. The qualified custodian sends statements to the clients showing all disbursements for the custodian account, including the amount of the advisory fee. Statements should coincide with the investment adviser or investment adviser representative billing period.

d. The investment adviser notifies the Commissioner in writing that the investment adviser intends to use the safeguards provided above. Such notification is required to be given on Form ADV, or

3. If the investment adviser or investment adviser representative has custody as defined in Rule 51-4.10(IA).A.1 by having an association or an affiliation with a Pooled Investment Vehicle and complies and provides the following safeguard requirements:

a. Engage an Independent Representative. Hire an independent representative to review all fees, expenses and capital withdrawals from the pooled accounts;

b. Review of Fees. Send all invoices or receipts to the independent representative, detailing the amount of the fee, expenses or capital withdrawal and the method of calculation such that the independent representative can:

i. Determine that the payment is in accordance with the pooled investment vehicle standards (generally the partnership agreement or membership agreement); and

ii. Forward, to the qualified custodian, approval for payment of the invoice with a copy to the investment adviser.

c. Notice of Safeguards. The investment adviser notifies the Commissioner in writing that the investment adviser intends to use the safeguards provided above. Such notification is required to be given on Form ADV.

3 CCR 704-1-51-4.10(IA)

38 CR 01, January 10, 2015, effective 1/30/2015

38 CR 08, April 25, 2015, effective 6/1/2015

38 CR 18, September 25, 2015, effective 10/15/2015

39 CR 01, January 10, 2016, effective 1/30/2016

40 CR 01, January 10, 2017, effective 1/30/2017

40 CR 12, June 25, 2017, effective 7/15/2017

41 CR 13, July 10, 2018, effective 7/31/2018

43 CR 05, March 10, 2020, effective 3/30/2020

46 CR 05, March 10, 2023, effective 3/30/2023