After identifying numerous issues with custody of investors’ funds, the SEC on Monday 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 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.
- 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.
In addition, examiners found that some advisers to pooled investment vehicles did not meet requirements to engage an independent accountant and demonstrate that financial statements were distributed to all fund investors.
“Because the safeguarding of assets is central to investor protection, it is critical that investment advisers follow our rules when they maintain custody of their clients’ funds,” SEC Chairman Elisse Walter said in a news release.
The Investor Bulletin notes that although the custody rule helps protect investors, it is not a substitute for investors’ own oversight and monitoring of their investments.
— Ken Tysiac ( firstname.lastname@example.org ) is a JofA senior editor.