Equity Services Inc. (“ESI”) may not retain custody of client assets, including security/stock certificates and funds, or serve in any capacity that gives ESI and/or its representatives legal ownership, control of, or access to client funds or securities.
In the event a branch office or Field OSJ receives funds (e.g. a check made payable to ESI, a representative, or a DBA) or securities (e.g. stock or bond) certificates from a client, the office must:
– Promptly record receipt of the items(s) on its Checks Received/Transaction Blotter and,
– Return the item(s) to the client by noon of the next business day following receipt.
Custody Defined
RRs/IARs who have custody or possession of client securities or funds are subject to extensive regulation pursuant to SEA Rule 240.15c3-3(k)(2)(ii) for broker dealers and Rule 206(4)-2 under the Investment Advisers Act of 1940 for investment advisers. ESI is exempt from these rules as long as ESI does not maintain custody of client funds or securities. This requires that ESI clear all transactions with and for customers with a clearing firm and promptly transmit all customer funds and securities.
These rules define custody as “holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them.”
Examples
Examples of what constitutes custody include:
– Possession of client funds or securities
NOTE: the following would not constitute custody as long as, by no later than noon the next business day:
- Bond or stock certificates received from a client are returned to the client;
- Checks received in conjunction with a new account or transfer of funds are forwarded to the appropriate party; or
- Checks received for a subsequent investment are forwarded to the product offeror.
– Any arrangement which authorizes or permits an RR/IAR to withdraw client funds or securities (e.g., a general power of attorney, direct debiting of advisory fees, etc.)
– Any capacity (e.g. general partner of a limited partnership, trustee, etc.) that gives an RR/IAR or a supervised person legal ownership or access to client funds or securities
Examples of custody, which are prohibited by ESI/EFA policies, include:
– Having a general power of attorney or signatory power over a client’s account*
– Serving as a trustee of a client’s trust*
– Acting as a general partner of a limited partnership client
– Having access to a customer’s checking/savings account or even maintaining their login info for their banking website.
Procedure for Handling Inadvertent Receipt of Assets
In the event an office inadvertently receives funds or security certificates from a client:
– Promptly record receipt on the Checks Received/Transaction Blotter.
– Scan the item(s) into Docupace using “ESI Inadvertent Receipt” to properly record the handling for ESI records. Items to be scanned should include copies of the following, as applicable:
– Item(s) received (stock certificate(s) or improperly addressed customer check)
– Correspondence returning item to client
– Overnight package receipt with tracking number to ensure delivery
– Reject the item(s) in Docupace (submitter rejects).
– Return the item(s) to the client in-person or by overnight mail by noon of the next business day.
Questions
If you have any questions, please feel free to contact ESI Compliance at 800-344-7437.
*Exceptions may be granted in situations involving family members (“family member” is a defined term in section 2.5.5 of the ESI Written Supervisory Procedures) but must be reviewed and approved by Compliance prior to establishing the relationship.
TC134310(0623)1