Regulation

After identifying numerous issues with custody of investors’ funds, the SEC issued a risk alert underscoring existing rules.

An SEC review of recent examinations of investment advisers where significant deficiencies were detected showed custody-related issues in about one-third of the firms examined, resulting in the alert by the SEC’s Office of Compliance Inspections and Examinations (OCIE).

The SEC found that some advisers:

• Did not recognize that they have custody, such as in situations where the adviser serves as a trustee and is authorized to write or sign checks for clients, or to make withdrawals from a client’s account as part of bill-paying services.
• Did not meet the custody rule’s surprise examination requirements. Investment advisers who have custody of client assets must enter into a written agreement with an independent public accountant to examine those assets on a surprise basis every year, according to an SEC Investor Bulletin issued along with the risk alert.
• Did not satisfy the custody rule’s qualified custodian requirements. For example, they may have mingled client, proprietary, and employee assets into a single account, or lacked a reasonable basis to believe that a qualified custodian is sending quarterly account statements to the client.

The risk alert is available at tinyurl.com/bj4xqcv.