According to Rule 206(4)-2 of the Investment Advisers Act of 1940 (the “Act”), the Securities and Exchange Commission (“SEC”) defines “custody” as “…holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them.” This definition gives a broad interpretation as to what constitutes custody, and leaves several grey areas for advisers to try to elucidate. Recently Charles Schwab published an article on one such area, stating that advisers who have access and login credentials to their client’s online accounts are generally deemed to have custody, if the custodian’s website permits the withdrawal and transfer of funds (regardless of whether the adviser is making such transfers or if the client allowed/disallowed such activities). In taking this a step further, what would be the outcome if an adviser did not have a client’s login credentials, but did the adviser utilize a “screen sharing” application, whereby both the client and the adviser have the ability to view the client’s online account, and each have access to make withdrawals/transfers to that account simultaneously?

While the SEC has not specifically addressed this practice in its Custody FAQs, consider the similar application of how may custody apply in the situation whereby the adviser is given hard copy statements of assets held away from the adviser, and the client requests guidance on their portfolio holdings. In this case, the adviser would not be deemed to have custody since the adviser, “did not have the ability to withdraw [or transfer] funds”[1] away from the client’s account.

Conversely, should login credentials be provided to the adviser in order for the adviser to view the client’s account in order to provide similar adviser, it could be construed that the adviser is deemed to have custody, for then the adviser would have the ability to withdraw funds from a client’s online account. This is a key differential that should be considered. In its FAQ, the SEC goes on to state that whether an adviser does or does not have the client’s authority to withdraw or transfer assets of such accounts is irrelevant. The mere fact that the adviser has the ability to make such changes is the focal point. As such, in a screen sharing scenario, if the adviser has the ability to make a withdrawal or transfer client funds, this would likely be deemed as having custody for purposes of Rule 206(4)-2 of the Act, subjecting the adviser to the reporting and auditing requirements therein.

For further information on this, or other related topics, please contact us at info@jackolg.com or (619)298-2880.