Safekeeping and Commingling Prohibitions

Now that you understand custody requirements for investment advisers, this section covers the broader obligation that applies to all securities professionals: keeping client assets separate and safe.

Prohibition on Commingling

Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices, it is a prohibited practice for a broker-dealer or agent to commingle customer funds or securities with the firm's own assets.

• Commingling means mixing client assets with the firm's proprietary funds or securities in the same account
• Each client's assets must be held in separate, identifiable accounts
• The prohibition applies to both broker-dealers and investment advisers

Safekeeping Obligations

Broker-dealers that hold customer securities have specific safekeeping duties:

• Customer securities held in street name must be kept separate from the firm's proprietary holdings in segregated accounts
• Securities held for customers must be properly identified and recorded as belonging to the customer
• Customer free credit balances (uninvested cash) must be properly accounted for and available for withdrawal on demand
• The firm has a duty of safekeeping; it is responsible for the security and proper handling of client assets

Misuse of Customer Funds

It is unlawful for any securities professional to misuse customer funds or securities in any way:

• Conversion (taking client assets for personal use) is the most severe form of misuse: it is essentially theft
• Using customer funds for the firm's own business purposes (even temporarily) constitutes misuse
• Borrowing from customer accounts without authorization is a violation
• The antifraud provisions of Uniform Securities Act (USA) Section 101 apply to misuse of customer funds, and no exemption shields this conduct

Exam Tip: Gotchas

• Commingling and conversion are different violations. Commingling is mixing client assets with firm assets in the same account (even if no assets are stolen). Conversion is taking client assets for personal use. Both are prohibited, but conversion is the more severe violation. The exam may test this distinction.