The custody rule exists to protect one thing: client assets from being misappropriated by the adviser who manages them. Its central and often surprising lesson is that custody is not just about holding assets; the mere ability to access or move them can trigger the rule's obligations.
An adviser has custody when it holds client funds or securities, or has any authority to obtain possession of them, which can include holding client login credentials, having a power of attorney to move assets, or acting as trustee. Fee deduction from client accounts is a limited form of custody with its own accommodations. Firms sometimes have custody without realizing it, which is a dangerous place to be.
When an adviser has custody, the rule generally requires that assets be held by a qualified custodian, that clients receive account statements from that custodian, and, in many cases, that the firm undergo an annual surprise examination by an independent accountant. These safeguards are meant to make it hard for a misappropriation to go undetected.
The rule is technical, and its definition of custody is broader than intuition suggests, so firms most often fail by having custody they did not recognize and therefore did not safeguard. Assessing custody status accurately is a foundational compliance task for any adviser.
If you can move it, you may custody it.
Greenridge L&C Advisors is a compliance consultancy, not a law firm. This is general information, not legal advice.