SEC warns investors, advisers of funds custody issues

BY KEN TYSIAC

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 ( ktysiac@aicpa.org ) is a JofA senior editor.

SPONSORED REPORT

Why cybercriminals are targeting CPAs

This free report expands on the most commonly found scams, why education and specialized IT knowledge help to lessen security vulnerabilities, and why every firm should plan carefully for how it would respond to a breach.

PODCAST

How tax reform — and Excel — are changing the CPA Exam

Mike Decker, the vice president of examinations at the AICPA, discusses changes being made to the exam as a result of tax reform — and about how Excel will now be available for use on the test.