Md. Code Regs. 02.02.05.04

Current through Register Vol. 51, No. 24, December 2, 2024

Section 02.02.05.04 - Custody of Client Funds or Securities

A. Conditions of Custody. As provided in the Maryland Securities Act, Corporations and Associations Article, § 11-302(f), Annotated Code of Maryland, it is unlawful for an investment adviser to take or have custody of securities or funds of a client unless:

(1) The investment adviser notifies the Commissioner in writing that the investment adviser has or may have custody, which notification may be given on Form ADV;

(2) The securities of each client are segregated, marked to identify the particular client having the beneficial interest in those securities, and held in safekeeping in a place reasonably free from risk of destruction or other loss;

(3) All client funds are deposited as follows:

(a) In one or more bank accounts containing only clients' funds,

(b) The account or accounts are maintained in the name of the investment adviser as agent or trustee for the clients, and

(c) The investment adviser maintains a separate record for each account showing the name and address of the bank where the account is maintained, the dates and amounts of deposits in and withdrawals from the account, and the exact amount of each client's beneficial interest in the account;

(4) Immediately after accepting custody or possession of funds or securities from a client, the investment adviser notifies the client in writing of the place and manner in which the funds and securities will be maintained and subsequently, if or when there is a change in the place or manner in which the funds or securities are maintained, the investment adviser gives written notice to the client;

(5) At least once every 3 months, the investment adviser sends to each client an itemized statement showing the client's funds and securities in the investment adviser's custody at the end of the period, and all debits, credits, and transactions in the client's account during that period; and

(6) At least once each calendar year, an independent certified public accountant or public accountant ("accountant") verifies all client funds and securities by an actual examination, which shall be made at a time chosen by the accountant without prior notice to the investment adviser. A report stating that the accountant has made an examination of the client funds and securities in the custody of the investment adviser, and describing the nature and extent of the examination, shall be filed with the Commissioner within 30 days after each examination.

B. Exception for Certain Broker-Dealers. This regulation does not apply to an investment adviser that is also registered as a broker-dealer under § 15 of the Securities Exchange Act of 1934 if the broker-dealer:

(1) Is subject to and in compliance with 17 CFR § 240.15c 3-1 (SEC Rule 15c3-1, Net Capital Requirements for Brokers or Dealers); or

(2) Is a member of an exchange whose members are exempt from 17 CFR § 240.15c 3-1 (SEC Rule 15c3-1, Net Capital Requirements for Brokers or Dealers) under the provisions of paragraph (b)(2) of that rule, and the broker-dealer is in compliance with all rules and settled practices of the exchange that impose requirements with respect to financial responsibility and the segregation of funds or securities carried for the accounts of customers.

Md. Code Regs. 02.02.05.04

Regulations .04 adopted as an emergency provision effective July 25, 1989 (16:16 Md. R. 1733); emergency status expired December 22, 1989
Regulations .04 adopted as an emergency provision effective December 23, 1989 (17:1 Md. R. 63); adopted permanently effective April 16, 1990 (17:7 Md. R. 845)