Nev. Admin. Code § 90.Sec. 7 - NEW
1.
Except as otherwise provided in this section, it is unlawful and deemed to be a
fraudulent, deceptive and manipulative act, practice and course of business for
an investment adviser, whether licensed or required to be licensed, to have
custody of client funds or securities.
2. An investment adviser, whether licensed or
required to be licensed, may have custody of client funds and securities if:
(a) The investment adviser promptly notifies
the Administrator on a Uniform Application for Investment Adviser Registration
(Form ADV) that the investment adviser has or may have custody of the client
funds and securities;
(b) Except as
otherwise provided in subsection 9, a qualified custodian maintains the client
funds and securities:
(1) In a separate
account for each client, the account of which must be designated by the name of
the client; or
(2) In an account
that contains only the client funds and securities and which is:
(I) In the name of the investment adviser, as
agent or trustee for the client; or
(II) In the case of a pooled investment
vehicle managed by the investment adviser, in the name of the pooled investment
vehicle;
(c)
Except as otherwise provided in subsection 10, the investment adviser notifies
each client whose funds or securities are maintained in an account described in
paragraph (b), the notification of which must:
(1) Be sent to the client:
(I) Upon the opening of the account;
and
(II) At any time there is a
change to the information described in subparagraph (2); and
(2) Include, without limitation:
(I) The name and address of the qualified
custodian;
(II) The manner in which
the client funds and securities are maintained; and
(III) If the investment adviser sends an
account statement to the client, a statement directing the client to compare
the account statement of the investment adviser with the account statement of
the qualified custodian;
(d) Except as otherwise provided in
subsection 10, the investment adviser has a reasonable basis, after due
inquiry, for believing that the qualified custodian described in paragraph (b)
sends, at least quarterly, to each client for which the qualified custodian
maintains funds and securities and to each person described in subparagraph (1)
of paragraph (e), if applicable, an account statement which includes, without
limitation:
(1) The amount of funds and type
of securities in the account at the end of the statement period; and
(2) Each transaction during the statement
period;
(e) The
investment adviser is a general partner of a limited partnership or managing
member of a limited-liability company, or the investment adviser otherwise
holds a comparable position for another type of pooled investment vehicle and
the investment adviser:
(1) Enters into a
written agreement with an independent party who is obliged to act in the best
interest of the limited partners, members or other beneficial owners to review
all fees, expenses and capital withdrawals from the accounts described in
paragraph (b); and
(2) Sends all
invoices and receipts to the independent party described in subparagraph (1).
The invoices and receipts must include, without limitation, the amount of the
fee, expenses or capital withdrawal and the method of calculation, such that
the independent party may:
(I) Determine that
the payment is in accordance with the standards of the pooled investment
vehicle, including, without limitation, any standard generally established in
the partnership agreement or membership agreement, as applicable; and
(II) Forward to the qualified custodian
approval for payment of the invoice with a copy to the investment
adviser;
(f)
Except as otherwise provided in subsections 10 and 11, the client funds and
securities are verified by actual examination at least once during each
calendar year by an independent certified public accountant pursuant to a
written agreement between the investment adviser and the independent certified
public accountant; and
(g) The
investment adviser maintains, or the investment adviser has custody because a
related person maintains, the client funds or securities as a qualified
custodian in connection with any advisory services the investment adviser
provides to clients and if:
(1) The
independent certified public accountant the investment adviser retains to
perform the independent verification required by paragraph (f) is registered
with and subject to regular inspection by, as of the commencement of the
professional engagement period and as of each calendar year-end, the Public
Company Accounting Oversight Board in accordance with its rules; and
(2) The investment adviser obtains, or
receives from its related person, within 6 months of becoming subject to this
paragraph and thereafter not less frequently than once each calendar year, a
written internal control report.
3. A client may designate an independent
representative to receive, on his or her behalf, the notices and account
statements described in paragraphs (d) and (e) of subsection 2.
4. With respect to shares of an open-end
company, the investment adviser may use the transfer agent of the open-end
company in lieu of a qualified custodian for the purpose of satisfying the
conditions set forth in subsection 2.
5. The examination described in paragraph (f)
of subsection 2 must:
(a) Be performed at a
time that is chosen by the independent certified public accountant who is a
party to the written agreement; and
(b) Occur without prior notice or
announcement to the investment adviser on a date that is irregular from year to
year.
6. The written
agreement described in paragraph (f) of subsection 2 must:
(a) Provide for the first examination to
occur within 6 months after the effective date, except that if an investment
adviser maintains client funds or securities pursuant to this section as a
qualified custodian, the agreement must provide for the first examination to
occur not later than 6 months after obtaining the internal control report;
and
(b) Require the independent
certified public accountant to:
(1) File a
certificate on Form ADV-E with the Administrator within 120 days after a date
chosen by the independent certified public accountant. The certificate must:
(I) State that the independent certified
public accountant has examined the funds and securities; and
(II) Describe the nature and extent of the
examination;
(2) Notify
the Administrator within 1 business day after the finding of any material
discrepancy during the course of the examination, by means of a facsimile
transmission or electronic mail, followed by first-class mail, directed to the
attention of the Administrator; and
(3) File, within 4 business days after the
resignation or dismissal from, or other termination of, the engagement, or
removal of itself or being removed from consideration for being reappointed, a
Form ADV-E accompanied by a statement that includes, without limitation:
(I) The date of the resignation, dismissal,
termination or removal and the name, address and contact information of the
independent certified public accountant; and
(II) An explanation of any problems relating
to the scope of the examination or the procedure that contributed to the
resignation, dismissal, termination or removal.
7. The internal control report
described in paragraph (g) of subsection 2 must:
(a) Be prepared by an independent certified
public accountant, who must:
(1) Verify that
the funds and securities are reconciled to a custodian other than the
investment adviser or a person related to the investment adviser; and
(2) As of the commencement of the
professional engagement period and as of each calendar year-end, be registered
with, and subject to regular inspection by, the Public Company Accounting
Oversight Board in accordance with its rules; and
(b) Include, without limitation, an opinion
of the independent certified public accountant described in paragraph (a) as to
whether controls have been placed in operation as of a specific date, and are
suitably designed and are operating effectively to meet control objectives
relating to custodial services, including, without limitation, the safeguarding
of funds and securities held by either the investment adviser or a related
person on behalf of the client of the investment adviser, during the
year.
8. The provisions
of paragraph (d) of subsection 2 and subsection 10 are not satisfied if the
account statement is sent solely to limited partners, members or other
beneficial owners who are not natural persons or are otherwise entities in and
of themselves and are related persons of the investment adviser.
9. The provisions of paragraph (b) of
subsection 2 do not apply if:
(a) The
securities:
(1) Were acquired from the issuer
in a transaction or chain of transactions not involving any public
offering;
(2) Are uncertificated
and ownership thereof is recorded only on the books of the issuer or its
transfer agent in the name of the client; and
(3) Are transferable only with prior consent
of the issuer or holder of the outstanding securities of the issuer;
and
(b) The following
requirements are met as they apply to securities held for an account of a
limited partnership, limited-liability company or other pooled investment
vehicle:
(1) The entity is audited;
(2) The audited financial statements are
distributed in the manner prescribed by subsection 10; and
(3) The investment adviser notifies the
Administrator on a Uniform Application for Investment Adviser Registration
(Form ADV) that the investment adviser intends to provide audited financial
statements.
10.
The provisions of paragraphs (c), (d) and (f) of subsection 2 do not apply to
an investment adviser, with respect to the account of a limited partnership,
limited-liability company or any other type of pooled investment vehicle, if:
(a) The investment adviser sends, at least
quarterly, to all limited partners, members or other beneficial owners of the
entity, as applicable, a statement showing:
(1) The total amount of all additions to and
withdrawals from the fund as a whole and the opening and closing value of the
fund at the end of the quarter based on the records of the custodian;
(2) A listing of all long and short positions
on the closing date of the statement in accordance with Rule ASC 946-210-50 of
the Financial Accounting Standards Board; and
(3) The total amount of additions to and
withdrawals from the fund by the investment adviser and the total value of the
interest of the investment adviser in the fund at the end of the
quarter;
(b) At least
annually the fund is subject to an audit and distributes, not later than 120
days after the end of its fiscal year, its audited financial statements,
prepared in accordance with generally accepted accounting principles, to each
limited partner, member or other beneficial owner of the entity and to the
Administrator;
(c) As of the
commencement of the professional engagement period and as of each calendar
year-end, the audit is performed by an independent certified public accountant
that is registered with, and subject to regular inspection by, the Public
Company Accounting Oversight Board in accordance with its rules;
(d) Upon liquidation and promptly after the
completion of the final audit, the investment adviser distributes the final
financial statements of the fund, prepared in accordance with generally
accepted accounting principles, to each limited partner, member or other
beneficial owner of the entity and to the Administrator;
(e) The written agreement with the
independent certified public accountant requires the independent certified
public accountant to, upon resignation or dismissal from, or other termination
of, the engagement, or upon removing itself or being removed from consideration
for being reappointed, notify the Administrator within 4 business days after
such resignation, dismissal, termination or removal, and the notification is
accompanied by a statement that includes, without limitation:
(1) The date of the resignation, dismissal,
termination or removal and the name, address and contact information of the
independent certified public accountant; and
(2) An explanation of any problems relating
to the scope of the audit or the procedure of the audit that contributed to the
resignation, dismissal, termination or removal; and
(f) The investment adviser notifies the
Administrator on a Uniform Application for Investment Adviser Registration
(Form ADV) that the investment adviser intends to use the statement delivery
and audit safeguards described in this subsection.
11. An investment adviser is not required to
obtain an annual verification of client funds and securities maintained by a
qualified custodian pursuant to paragraph (f) of subsection 2 if:
(a) The investment adviser has:
(1) Custody of the funds and securities
solely as a consequence of the authority of the investment adviser to make
withdrawals from client accounts to pay the advisory fee of the investment
adviser; and
(2) Written
authorization from the client to deduct advisory fees from the account held
with the qualified custodian;
(b) Each time a fee is to be directly
deducted from a client account, the investment adviser concurrently sends:
(1) The qualified custodian or the
independent representative designated pursuant to subsection 3, as applicable,
an invoice or statement of the amount of the fee to be deducted from the
account of the client; and
(2) The
client an invoice or statement itemizing the fee, the itemization of which must
include the formula used to calculate the fee, the amount of assets under
management the fee is based on and the time period covered by the fee;
and
(c) The investment
adviser notifies the Administrator on a Uniform Application for Investment
Adviser Registration (Form ADV) that the investment adviser intends to use the
safeguards provided in this subsection.
12. The provisions of this section do not
apply to the account of an investment company registered under the Investment
Company Act of 1940.
13. The
provisions of this section do not apply to an investment advisory contract
entered into by an investment adviser when the investment adviser was not
licensed and was not required to be licensed pursuant to
NRS
90.330 if the investment adviser was in
compliance with all rules and regulations regarding performance-based
compensation in each jurisdiction in which the investment adviser was
registered or required to be registered at the time of entering into the
advisory contract. For the purposes of this subsection, a transfer of an equity
ownership interest in a private investment company by gift or bequest, or
pursuant to an agreement related to a legal separation or divorce, will not
cause the provisions of this section to apply to the transferee.
14. As used in this section:
(a) "Control" means the power, directly or
indirectly, to direct the management or policies of a person, whether through
ownership of securities, by contract or otherwise. Each of the following
persons is presumed to have control:
(1) An
officer, partner or director of the investment adviser, and any other person
having similar status or function, who exercises executive
responsibility;
(2) A person who,
directly or indirectly, has the right to vote 25 percent or more of a class of
the voting securities of a corporation;
(3) A person who has the power to sell or
direct the sale of 25 percent or more of a class of the voting securities of a
corporation;
(4) A person who has
the right to receive upon dissolution, or has contributed, 25 percent or more
of the capital of a partnership;
(5) A person who, directly or indirectly, has
the right to vote 25 percent or more of a class of the interests of a
limited-liability company;
(6) A
person who has the right to receive upon dissolution of a limited-liability
company, or has contributed, 25 percent or more of the capital of the
limited-liability company;
(7) A
person who is an elected manager of a limited-liability company; or
(8) A person who is a trustee or managing
agent of a trust.
(b)
"Custody" means holding, directly or indirectly, client funds or securities,
having any authority to obtain possession of the funds or securities or having
the ability to appropriate the funds or securities. The term:
(1) Includes, without limitation:
(I) An investment adviser if a related person
holds, directly or indirectly, client funds or securities, or has any authority
to obtain possession of the funds or securities, in connection with any
advisory services the investment adviser provides to clients;
(II) Possession of client funds or
securities, unless the investment adviser receives the funds or securities
inadvertently and returns the funds or securities to the sender within 3
business days after receiving the funds or securities and the investment
adviser maintains the records required by section 13;
(III) Any arrangement, including, without
limitation, a general power of attorney, under which the investment adviser is
authorized or permitted to withdraw client funds or securities maintained with
a custodian upon the instruction of the investment adviser to the custodian;
and
(IV) Any capacity, including,
without limitation, as a general partner of a limited partnership, managing
member of a limited-liability company or a comparable position for another type
of pooled investment vehicle, or a trustee of a trust, that gives the
investment adviser or any supervised person legal ownership of or access to
client funds or securities; and
(2) Does not include the receipt of checks
drawn by clients and made payable to third parties if the checks are forwarded
to the third party within 3 business days after receipt and the investment
adviser maintains the records required by section 13.
(c) "Independent certified public accountant"
means a certified public accountant that meets the standards of independence
described in 17 C.F.R. "
210.2 -01(b) and (c).
(d) "Independent party" means a person that:
(1) Is engaged by the investment adviser to
act as a gatekeeper for the payment of fees, expenses and capital withdrawals
from a pooled investment;
(2) Does
not control, is not controlled by and is not under common control with the
investment adviser;
(3) Does not
have, and has not had within the immediately preceding 2 years, a material
business relationship with the investment adviser; and
(4) Is prohibited from negotiating or
agreeing to have material business relations or commonly controlled relations
with an investment adviser for a period of 2 years after serving as the person
engaged in an independent party agreement.
(e) "Independent representative" means a
person who:
(1) Acts as an agent for an
advisory client, in the case of a pooled investment vehicle, for a limited
partner or a limited partnership, for a member of a limited-liability company
or for a beneficial owner of another type of pooled investment vehicle, and who
is, by law or contract, obliged to act in the best interest of the advisory
client, limited partner, member or other beneficial owner;
(2) Does not control, is not controlled by
and is not under common control with the investment adviser; and
(3) Does not have, and has not had within the
immediately preceding 2 years, a material business relationship with the
investment adviser.
(f)
"Open-end company" has the meaning ascribed to it in section 5(a)(1) of the
Investment Company Act of 1940.
(g)
"Qualified custodian" means the following:
(1)
A bank or savings association that has deposits insured by the Federal Deposit
Insurance Corporation under the Federal Deposit Insurance Act;
(2) A broker-dealer who:
(I) Is registered in this State and with the
Securities and Exchange Commission; and
(II) Holds client assets in customer
accounts;
(3) A
registered futures commission merchant who:
(I) Is registered under section 4f(a) of the
Commodity Exchange Act; and
(II)
Holds client assets in customer accounts, but only with respect to the funds
and security futures of the client, or other securities incidental to
transactions in contracts for the purchase or sale of a commodity for future
delivery and options thereon; and
(4) A foreign financial institution that
customarily holds financial assets for its customers, if the foreign financial
institution keeps the assets of the advisory client in customer accounts
segregated from the proprietary assets of the foreign financial
institution.
(h) "Related
person" means any person, directly or indirectly, controlling or controlled by
the investment adviser, and any person that is under common control with the
investment adviser.
Notes
NRS 90.450, 90.750
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