Excluding advisory fees and authorized disbursement to an account with the same registration of the customer, do you have power to withdraw or disburse funds in the account?

This question helps the insurance carrier evaluate the significant risk associated with having direct control over client funds. Possessing the authority to withdraw or disburse client funds—beyond collecting your own fees or making simple transfers between a client's own accounts—is considered "custody" by regulators. Having custody dramatically increases your firm's regulatory obligations and heightens the risk of E&O claims related to potential misuse, misappropriation, or unauthorized movement of client assets.

• What is the "Power to Withdraw or Disburse Funds"? This refers to having the authority to move money out of a client's account. The question specifically carves out two common, lower-risk activities: deducting your advisory fees and transferring money between two accounts owned by and registered to the same client. It focuses on any power beyond those two actions.
• What is "Custody"? In the context of an investment advisor, custody means you have direct or indirect access to or control over client funds or securities. The power to withdraw funds to pay a client's bills or transfer money to a third party on their behalf is a form of custody.
• What is a "Standing Letter of Authorization (SLOA)"? This is an agreement signed by a client that authorizes an advisor to move money from their account to a designated third party (like their attorney or a family member). Even with this client authorization, the SEC may still consider this to be a form of custody.

To answer this, you must determine if you have any ability to move client money, aside from the two specific exceptions listed.

• Review your authority: Do you have the ability to pay a client's bills from their account? Can you transfer money to a third party for them? Do you have check-writing authority on any client account?
• Consider the exceptions: The question excludes your ability to:
  1. Deduct your advisory fees.
  2. Transfer a client's money between their own identically-named accounts (e.g., from their brokerage account to their checking account).
• Any other power counts: If you have any authority to move money beyond these two specific exceptions, you must answer "yes."

If you have no such power, you can answer "no."

• Mistake: Believing that because a client authorized you via a Standing Letter of Authorization (SLOA), you don't have custody.
  • This is incorrect. The SEC has specific guidance on SLOAs, and in many cases, this authority is still considered a form of custody that must be disclosed and managed with specific safeguards.
• Pitfall: Thinking this only applies to having physical possession of client checks or cash.
  • Custody is broader than physical possession. The electronic authority to move money from a client's account at a bank or broker-dealer is a form of custody.
• Mistake: Believing that since you only do it for a few trusted, long-time clients, it doesn't need to be disclosed.
  • This authority must be disclosed regardless of how many clients it applies to or how well you know them. The risk and regulatory obligations are the same.