Custody Rule

Rule 206(4)-2, the "custody rule", under the Investment Advisers Act of 1940, requires registered investment advisers that have custody of client funds or securities to maintain those assets with a qualified custodian. The SEC’s intent was to design requirements to enhance protections for advisor-client assets while reducing the burdens on advisors that have custody of client assets.

Custody rule's key requirements include:

  • Use of a "qualified custodian" to hold client assets
  • Notices to clients detailing how their assets are being held
  • Account statements for clients detailing their holdings
  • The audit approach for advisers of pooled investment vehicles

The rule's objective is to increase protection for investors.