SEC Warns of Significant Deficiencies Involving Adviser Custody and Safety of Client Assets

The Securities and Exchange Commission recently issued a Risk Alert on compliance with its custody rule for investment advisers, as well as an Investor Bulletin about the rule. SEC-registered investment advisers with custody of client assets must comply with the custody rule, which is part of the Investment Advisers Act of 1940, and is designed to protect advisory clients from the misuse or misappropriation of their funds and securities. The SEC’s warnings follow the SEC National Examination Program’s (“NEP”) observation of “widespread and varied non-compliance with elements of the custody rule.”

The Risk Alert is a warning issued by the SEC following its discovery of “significant deficiencies” in the way that investment advisers are handling the custody of client assets. The SEC identified custody-related problems in one-third of the firms reviewed, or about 140 firms. These shortcomings included advisor failure to recognized that they maintain control of their clients’ assets, commingling of client, proprietary, and employee assets in a single account, and deficiencies in surprise-exam requirements.

“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.

As a result, of the SEC’s findings, investment advisers have taken various remedial measures, such as drafting, amending or enhancing their written compliance procedures, policies, or processes; changing their business practices; or devoting more resources or attention to the area of custody, among other things. Moreover, the NEP has also made referrals to the SEC’s Division of Enforcement.

“We take deficiencies in this area very seriously and want to put advisers on alert about the importance of complying with the custody rule. It is a key component of our investment adviser examination program,” said Carlo di Florio, director of the SEC’s Office of Compliance Inspections and Examinations.

The Investor Bulletin, issued by the SEC’s Office of Investor Education and Advocacy, is intended to educate investors regarding the custody rule. The Investor Bulletin 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 Investor Bulletin also cautions that even though the custody rule provides enhanced protections to investors, it is no substitute for investors’ own oversight and monitoring of their investments.

Investment advisers typically maintain their client’s assets with third-party custodians like Charles Schwab & Co. or TD Ameritrade Inc. Bernard Madoff’s $65 billion Ponzi scheme was perpetuated, in part, by his firm maintenance of custody of client assets, rather than utilizing a third-party custodian.

Sonn Law Group is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against investment advisors, brokerage firms, banks and insurance companies. To learn more, please call us at 844-689-5754 or complete our “contact form.”

Rate this post:

1 Star2 Stars3 Stars4 Stars5 Stars
(No Ratings Yet)
Loading...