Compliance Solutions for Investment Advisers

Top 3 Custody Deficiencies

As stated in the recent SEC Risk Alert, the 3 most frequent custody issues identified in examinations of investment advisers are as follows:

  1. Advisers did not recognize that they may have custody due to online access to client accounts. An adviser’s online access to client accounts may meet the definition of custody when such access provides the adviser with the ability to withdraw funds and securities from the client accounts. The staff observed that certain advisers may not have properly identified custody as a result of them having access to online accounts using clients’ personal usernames and passwords.
  2. Advisers with custody obtained surprise examinations that do not meet the requirements of the Custody Rule. The SEC staff observed that certain advisers did not provide independent public accountants performing surprise examinations with a complete list of accounts over which the adviser has custody or otherwise provide information to accountants to permit the accountants to timely file accurate Form ADV-Es. In addition, staff observed indications suggesting that surprise examinations may not have been conducted on a “surprise” basis (e.g., exams were conducted at the same time each year).
  3. Advisers did not recognize that they may have custody as a result of certain authority over client accounts. The SEC staff observed that certain advisers did not appear to recognize that they may have custody over client accounts as a result of having (or related persons having) powers of attorney authorizing them to withdraw client cash and securities. Other examples of custody that appeared unrecognized include when advisers or their related persons served as trustees of clients’ trusts or general partners of client pooled investment vehicles.
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