The SEC Is Not Happy with Custody Compliance

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The Securities and Exchange Commission issued a Risk Alert on compliance with its custody rule for investment advisers. Beyond the warning to investment advisers, it also issued an Investor Bulletin to protect advisory clients from theft or misuse of their funds and securities.

After a review of recent examination, the SEC’s Office of Compliance Inspections and Examinations found significant deficiencies in custody-related issues in about one-third of the firms examined that had serious deficiencies.

  • Failure to recognize that they have custody, such as situations where the adviser serves as trustee, is authorized to write or sign checks for clients, or is authorized to make withdrawals from a client’s account as part of bill-paying services
  • Failure to meet the custody rule’s surprise examination requirements
  • Failure to satisfy the custody rule’s qualified custodian requirements, for instance, by commingling client, proprietary, and employee assets in a single account, or by lacking a reasonable basis to believe that a qualified custodian is sending quarterly account statements to the client.
  • For fund managers, failures to (1) meet requirements to engage an independent accountant and (2) demonstrate that financial statements were distributed to all fund investors.

In the Risk Alert, the SEC is shares some of the custody deficiencies observed in order to assist investment advisers in complying with the custody rule.

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