What Is A ‘Related Person’? (SEC ADV Part 1, Item 9, Question F)

Compliance with the principles of the Securities and Alternate Fee (SEC) is troublesome. It typically requires weeks of labor, not merely to fill out the types but in addition to grasp what the types are asking.

Merchandise 9 Custody, presents maybe among the most complicated and most frequently modified compliance questions. I’ve coated this merchandise earlier than in “Answering SEC ADV Half 1 Merchandise 9 Custody is Consultant of a Bigger Compliance Drawback.”

Towards the tip of Merchandise 9 Custody, query F asks:

“In case you or your associated individuals have custody of consumer funds or securities, what number of individuals, together with, however not restricted to, you and your associated individuals, act as certified custodians to your purchasers in reference to advisory providers you present to purchasers?”

The wording of this compliance query is complicated.

At first look, you’d suppose it is best to skip this query if you do not have actual custody of consumer accounts.

Nonetheless, many advisors have custody solely within the restricted sense that they will transfer cash between two completely different consumer accounts or distribute their administration payment. With that interpretation of “have custody,” you’ll be tempted so as to add up the variety of workers (folks) who’ve this capacity and put that quantity on this reply.

Nonetheless, the query is asking for what number of “individuals … act as certified custodians.” If folks means “workers,” then you definately’d suppose that it is best to reply zero, which means that none of your workers acts as a professional custodian. Nonetheless, that isn’t what they imply once they say “folks.”

Every of the phrases in italics presents a hyperlink to a supplied glossary of phrases. On this case the essential definition is supplied by the definition of the phrase “individual”:

“Individual: A pure individual (a person) or an organization. An organization contains any partnership, company, belief, restricted legal responsibility firm (“LLC”), restricted legal responsibility partnership (“LLP”), sole proprietorship, or different group. [Used throughout Form ADV and Form ADV-W]”

Individual might imply a pure individual, which means an actual human being, but it surely might additionally imply an organization.

Inserting this definition into the unique query, the paraphrase can be:

“In case you have custody of consumer funds or securities, what number of corporations (or pure folks) act as certified custodians for the accounts together with your advisory providers?”

This means that the SEC is asking what number of corporations act as certified custodians for accounts with advisory providers and when you have custody, you reply this query and if you do not have custody, then you do not reply it. Nonetheless, the reply field requires an integer and is marked as incomplete if you don’t reply it.

This eliminates the choice that the conditional phrase initially governs whether or not or not you reply the query.

Due to this fact, both the conditional phrase — “In case you have custody of consumer funds or securities,” — is irrelevant and also you merely reply with the variety of certified custodians for accounts with advisory providers or the primary a part of the query means one thing apart from what it explicitly says.

Due to the conditional phrase initially, plainly the SEC desires the variety of corporations that act as certified custodians for accounts with custody. Nonetheless, they did not say that. They stated accounts “in reference to advisory providers you present to purchasers.”

From this, we had a fierce inside debate over the grammar of this query. How are you presupposed to reply it?

Now we have a number of corporations that act as certified custodians for accounts with our advisory providers. Nonetheless, we solely have one firm appearing as a professional custodian for the accounts the place our workers has the flexibility to maneuver cash between accounts not identically named (also called third get together transfers). That firm is Charles Schwab.

Ultimately, we interpreted the conditional phrase to manipulate the whole sentence (In any other case, why is it there?) and assumed the query was asking for what number of certified custodians work with accounts the place you’ve gotten custody.

Consequently, we answered “1” to Merchandise 9 Custody, F. The one is Charles Schwab.

I am undecided why they phrased the query the best way that they did. At first, second, third, and even twentieth learn, it’s not clear what particularly they’re asking.