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.Nev. Admin. Code § 90.Sec. 7
Added to NAC by Sec'y of State by R018-21A, eff. 6/2/2023