Compliance with Bonding Requirements for Advisers with Discretion Over Client Assets (Nov. 14, 2012)
The Massachusetts Securities Division (the “Division”) would like to remind advisers that the Code of Massachusetts Regulations at 950 CMR 12.205(5)(a) requires that Massachusetts-registered investment advisers that have discretion over client accounts to be bonded in an amount not less than $10,000.00 by a bonding company qualified to do business in the Commonwealth.1
The Division generally takes the position that, for the purpose of this requirement, discretion means that the adviser has authority to execute buy or sell transactions for a client’s securities portfolio. An adviser can have such authority granted to it through, for example, advisory contracts, powers of attorney, trustee relationships, or an executed limited trading authority.
Advisers, on occasion, have a limited trading authorization form on file with a custodian for the convenience of their clients, but do not buy or sell securities without first authorizing each trade with the client prior to execution. In such cases, the adviser will not be subject to the bonding requirement of 950 CMR 12.205(5)(a) but only if:
1) the adviser’s contract with the client explicitly states that the adviser does not have trading discretion;
2) the adviser acquires permission or clears each and every trade prior to and on the same day that the adviser issues the order to buy or sell; and
3) the adviser documents all such clearances in a written form, such as an e-mail or a log or journal and maintains such documentation for a period of five (5) years from the date of the transaction.
During routine books and records examinations, examiners will be reviewing adviser’s practices to ensure compliance with these requirements.
1 This policy is applicable to Massachusetts advisers that are both registered with and located in Massachusetts. Advisers that maintain their principal office in another state and are registered there are subject to their home state’s books and records rules and bonding requirements.