Custody Rule

B is correct. When an adviser's only custody is the authority to deduct fees directly from client accounts, and the adviser has written client authorization, the adviser has custody and must disclose it on Form ADV Part 1A Item 9. However, this limited custody for fee deduction does NOT trigger the surprise examination requirement.

A is incorrect because the annual surprise exam requirement applies only to advisers with actual custody beyond mere fee deduction authority. The SEC created this exception to avoid unnecessarily burdening advisers whose only "custody" is standard fee deduction. C is incorrect because the authority to deduct fees from client accounts IS a form of custody under the rule, even though Thomas doesn't have physical possession. The custody rule defines custody broadly to include any capacity to access client funds. D is incorrect because while some states require minimum net worth for advisers with custody ($35,000 is common), the surprise examination requirement is the primary federal custody rule obligation, and this question asks specifically about SEC Custody Rule requirements.

B is correct. The SEC Custody Rule defines qualified custodians as: (1) banks or savings associations, (2) registered broker-dealers, (3) futures commission merchants (FCMs), (4) certain foreign financial institutions, and (5) registered transfer agents. These entities must maintain client assets in separate accounts under the client's name.

A is incorrect because investment advisers themselves do NOT qualify as custodians for their own clients' assets. that would defeat the purpose of the custody rule's protective safeguards. C is incorrect because while FDIC insurance is a feature of many qualified custodians (banks), not all FDIC-insured institutions qualify, and broker-dealers (which can be qualified custodians) are covered by SIPC, not FDIC. D is incorrect because advisers with custody must use an independent qualified custodian; they cannot serve as their own custodian even with adequate net worth.

C is correct. The custody rule requires that clients receive account statements at least quarterly (every 3 months). These statements must be sent by the qualified custodian directly to clients, not by the adviser. This ensures independent verification of account holdings and transactions.

A is incorrect because monthly statements are not required (though they exceed the minimum), and the adviser cannot send the required custody statements. they must come from the independent qualified custodian. B is incorrect because while quarterly is the correct frequency, the statements must be sent by the qualified custodian, not the adviser. Allowing the adviser to send the statements would undermine the custody rule's purpose of independent oversight. D is incorrect because quarterly (at least every 3 months) is required, not annually. Annual statements would not provide sufficient investor protection or timely detection of discrepancies.

A is correct (the EXCEPT answer). Discretionary authority. the power to make investment decisions (buy/sell securities) without prior client approval for each transaction. does NOT constitute custody. Discretion and custody are separate concepts. Having discretion means you can make trading decisions; having custody means you can access, possess, or control client assets.

B creates custody: Serving as trustee gives the adviser control over trust assets and is explicitly defined as custody. Trustees have legal authority to manage and distribute trust assets, which gives them possession and control. C creates custody: Power of attorney that authorizes withdrawal of funds or securities constitutes custody because the adviser has the ability to move client assets. D creates custody: Authority to directly deduct fees from client accounts is a form of custody (though it qualifies for an exception from the surprise examination requirement if properly authorized in writing).

B is correct. Statements 1, 2, and 3 are all accurate custody rule requirements.

Statement 1 is TRUE: Advisers with custody must arrange for an annual surprise examination by an independent public accountant. Since Summit serves as trustee (actual custody beyond mere fee deduction), the surprise exam requirement applies. The accountant verifies that client assets match records.

Statement 2 is TRUE: Clients must receive account statements at least quarterly, and these must be sent by the qualified custodian (Fidelity) directly to clients. This provides independent verification of account holdings and protects against fraud.

Statement 3 is TRUE: Advisers with custody must disclose this on Form ADV Part 1A Item 9, including information about the qualified custodian and custody arrangements. This disclosure alerts regulators to conduct appropriate oversight.

Statement 4 is FALSE: While some states require minimum net worth for advisers with custody (commonly $35,000), the federal SEC custody rule does NOT impose a minimum net worth requirement of $100,000. The $100,000 figure is sometimes associated with state bonding requirements, but it's not a universal custody rule requirement. The surprise examination, qualified custodian use, and Form ADV disclosure are the core federal requirements.