Unscrupulous investment advisers who defraud their unsuspecting clients are increasingly prevalent in our society. Consequently, investors must be increasingly vigilant to protect themselves from such individuals. A custodial bank is one way investors can prevent mismanagement and misuse of funds and securities they entrust to financial advisers. However, the United States Court of Appeals for the Eleventh Circuit opinion Lamm v. State Street Bank & Trust illustrates that the mere presence of a custodial bank does not adequately insulate investors from fraudulent adviser activity. Under current Securities and Exchange Commission (SEC) regulations, specifically 17 Code of Federal Regulations (C.F.R.) Section 275.206(4)-2 and boilerplate custody agreements, custodial banks have no duty to verify the validity of account statement contents, which include transactions made by clients' investment advisers and adviser-provided market valuations of account assets. Therefore, there is a strong incentive for custodial banks to distinguish their commoditized accounts by giving custodial account holders the option to supplement the custodial services banks traditionally supply with account services that facilitate increased transparency.
Jones, Steven L.
"Custodial Collies of Transparency-The Competitive Advantage of Protecting Investing Lamm[bs] from Advising Wolves: Lamm v. State Street Bank & Trust,"
Mercer Law Review: Vol. 66:
4, Article 12.
Available at: https://digitalcommons.law.mercer.edu/jour_mlr/vol66/iss4/12