Section 710IAC4-9-13. Custody and possession of client funds or securities

   (a) It shall constitute a dishonest practice within the meaning of IC 23-19-4-12(d)(13) for any investment adviser or investment adviser representative who has custody or possession of any funds or securities in which a client has a beneficial interest to do any act or take any action, directly or indirectly, with respect to the funds or securities unless the following occur:

(1) The investment adviser notifies the commissioner in writing, through Form ADV or otherwise, that the investment adviser has or may have custody.

(2) The securities of each client are segregated, marked to identify the particular client who has the beneficial interest therein, and held in safekeeping in some place reasonably free from risk of destruction or other loss.

(3) All funds of the clients are deposited in one (1) or more bank accounts that contain only clients' funds, and the following occur:

(A) The accounts are maintained in the name of the investment adviser as agent or trustee for the clients.

(B) The investment adviser maintains a separate record for each account that shows the following:

(i) The name and address of the bank where the account is maintained.

(ii) The dates and amounts of deposits in and withdrawals from the account.

(iii) The exact amount of each client's beneficial interest in the account.

(4) Immediately after accepting custody or possession of funds or securities from any client, the investment adviser notifies the client in writing of the following:

(A) The place and manner in which the funds and securities will be maintained.

(B) Any change in the place or manner in which the funds are being maintained.

(5) The investment adviser sends each of these clients an itemized statement showing the current funds and securities in the investment adviser's custody or possession at least once every three (3) months. The statement shall include all:

(A) debits;

(B) credits; and

(C) transactions;

occurring in the client's account during that period.

(6) At least once every calendar year, an independent certified public accountant or an independent public accountant verifies all client funds and securities of clients by actual examination at a time chosen by the accountant without prior notice to the investment adviser. A report of the accountant, stating that he or she has made an examination, shall be filed with the commissioner promptly after each examination. The accountant's report should comply with the usual technical requirements as to dating, salutation, and signature and should include in general terms an appropriate description of the scope of the physical examination of the securities and examination of the related books and records. In addition, the accountant's report will set forth the following:

(A) The date of the physical count and confirmation of balances of the client's accounts.

(B) A clear designation of the place and manner in which funds and securities are maintained.

(C) Whether the examination was made with prior notice to the investment adviser.

(D) The results of the examination, including the following:

(i) An expression of opinion as to whether the investment adviser was in compliance with this section as of the examination date.

(ii) An expression of opinion as to whether the investment adviser had been complying with this section during the period since the prior examination date. If the accountant believes that the investment adviser has not complied with this section, the accountant must state the reasons for his or her belief.

(iii) An identification of any material inadequacies found to exist in the books, records, and safekeeping facilities referred to in this section.

(iv) Any corrective action taken to remedy a material inadequacy.

(v) Corrective action that should be taken to remedy a material inadequacy.

  (b) This section shall not apply to an investment adviser also registered as a broker-dealer under Section 15 of the Securities Exchange Act of 1934 (15 U.S.C. 78o) if the broker-dealer or agent is:

(1) subject to and in compliance with SEC Rule 15c3-1(17 CFR 240.15c3-1) (Net Capital Requirement for Brokers or Dealers) under the Securities Exchange Act of 1934; or

(2) a member of an exchange whose members are exempt from Rule 15c3-1, under the provisions of paragraph (b)(2) of that rule;

and the broker-dealer or agent is in compliance with all rules and settled practices of the exchange imposing requirements with respect to financial responsibility and the segregation of funds or securities carried for the account of customers. (Securities Division; 710 IAC 4-9-13; filed Jun 28, 2010, 2:36 p.m.: 20100728-IR-710100044FRA; readopted filed May 12, 2016, 1:47 p.m.: 20160608-IR-710160136RFA)