NASAA Custody Rule
The NASAA Model Rule on Custody of Client Funds and Securities establishes requirements for how state-registered investment advisors must safeguard client assets, including qualified custodian standards, surprise examination requirements, and account statement delivery obligations.
Key Requirements
Qualified Custodian Requirement
Client funds and securities must be maintained with a qualified custodian such as a bank, broker-dealer, or trust company. Advisors may not hold client assets unless an exception applies.
Surprise Examination
Advisors deemed to have custody must undergo an annual surprise examination by an independent public accountant to verify client assets.
Account Statement Delivery
Clients must receive account statements directly from the qualified custodian at least quarterly. Advisors who send their own statements must include a notice urging clients to compare them.
Custody Reporting to Regulators
Advisors with custody must file specific disclosures on Form ADV and may be required to submit additional reports to their state regulator.
Fee Deduction Authorization
Advisors who deduct fees directly from client accounts must have written authorization and must send fee invoices to clients and the custodian simultaneously.
State Adoption Status
Adoption of NASAA model rules varies by state. Some states adopt the model rule directly, while others have their own rules covering the same requirements.
Visit the State Adoption Tracker for a complete per-state breakdown. Data sourced from NASAA model rule matrix and NV 2024 Legislative Survey. Last verified March 2026.
Common Violations
Avoid these frequently cited deficiencies during state examinations.
Inadvertent Custody
Failing to recognize that certain arrangements — such as acting as trustee, having authority to withdraw client funds, or holding client login credentials — constitute custody.
Missing Surprise Examinations
Not scheduling or completing the required annual surprise examination when the advisor has custody of client assets.
Inadequate Fee Deduction Documentation
Deducting fees from client accounts without proper written authorization or failing to notify clients and custodians simultaneously.
Statement Delivery Failures
Not ensuring that clients receive account statements directly from the qualified custodian on at least a quarterly basis.
Unqualified Custodians
Maintaining client assets with entities that do not meet the definition of a qualified custodian under state law.
Best Practices
Frequently Asked Questions
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