The alert by the SEC’s Office of Compliance Inspections and Examinations (OCIE) comes after a review of recent examinations where significant deficiencies were identified showed custody-related issues in about one-third of the firms examined. The advisers’ deficiencies included:
- 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.
In addition, for advisers to audited pooled investment vehicles, the examinations found some failed to 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,” said SEC Chairman Elisse B. Walter.
“We take deficiencies in this area very seriously and want to put advisers on alert about the importance of complying with the custody rule,” said OCIE Director Carlo V. di Florio. “It is a key component of our investment adviser examination program.”
The alert notes that the recent findings of custody deficiencies have resulted in a range of actions. These included remedial measures by advisers, such as drafting, amending or enhancing their written compliance procedures, policies or processes, changing their business practices, or devoting more resources or attention to custody issues. OCIE’s National Exam Program also has made referrals to the SEC’s Division of Enforcement where appropriate.
The bulletin by the SEC’s Office of Investor Education and Advocacy (OIEA) describes the requirements of the custody rule, including the requirement for custodians to send account statements to investment advisory clients at least every quarter. The bulletin notes that even though the custody rule provides enhanced protections to investors, it is not a substitute for investors’ own oversight and monitoring of their investments.
“Investors should always ask questions — including questions about the custody issues discussed in this Investor Bulletin — when considering an investment,” said OIEA Director Lori Schock. “Asking questions and monitoring investments are key ways to protect yourself from investment fraud.”