What Is the Custody Rule (Rule 206(4)-2)?

“Custody” is defined broadly — it includes not just physically holding client assets, but also having the authority to withdraw funds (such as through fee deduction arrangements) or serving in certain trustee or power-of-attorney roles. Advisers deemed to have custody must use a qualified custodian (typically a bank or registered broker-dealer) to hold client assets, ensure the custodian sends account statements directly to clients at least quarterly, and generally engage an independent public accountant to conduct an annual surprise examination verifying client assets.

Some advisers are surprised to learn they have custody under the rule’s definition — for example, firms with the ability to deduct advisory fees directly from client accounts, or those acting as trustee for client trusts, may trigger custody obligations without realizing it.