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UPDATE: SEC Issues Risk Alert on Custody Rule Noting Several Common Deficiencies (March 2013)
In December 2009, the SEC approved the custody rule of the Investment Advisers Act of 1940, requiring that advisers deemed to have custody of client funds or securities undergo an annual surprise examination, among other requirements.
On March 4, the SEC’s Office of Compliance Inspections and Examinations issued a Risk Alert regarding investment advisers’ compliance with the custody rule and also issued an Investor Bulletin about the rule, which is designed to protect advisory clients from theft or misuse of their funds and securities. The alert identified significant deficiencies that were identified in approximately 1/3 of recent firms examined and noted the range of remedial actions taken. In order to assist advisers in complying with the custody rule, below are common deficiencies applicable to PFP/PFS members identified in the Risk Alert:
- 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.
Advisers should review their practices in light of the deficiencies noted in this Risk Alert and their responsibilities under the custody rule to protect client assets. Read more from the SEC about the Risk Alert and Investor Bulletin. Read “All You Ever Wanted to Know About the New SEC Custody Rule” by compliance expert, Ellen Bruno, CPA/PFS in the March/April 2010 issue of Planner. Learn more about the custody rule and the AICPA’s advocacy efforts, and contact us if you need more guidance to ensure you are complying with requirements.
UPDATE: Custody Rule Reminder and Recent Feedback from SEC Staff (February 2012)
In December 2009, the SEC approved the custody rule of the Investment Advisers Act of 1940, requiring that advisers deemed to have custody of client funds or securities undergo an annual surprise examination, among other requirements. Learn more about the rule and the AICPA’s advocacy efforts. Read a summary and full analysis of the final rule and/or the SEC FAQs (last updated in December, 2011).
At the January 31st SEC Compliance Outreach Program National Seminar (watch the archived webcast), SEC staff provided feedback and advice to advisers subject to the custody rule. Panelists emphasized that custody is a critical piece of the SEC examination process, and laid out expectations relating to custody for SEC exams. Examiner expectations of advisers on-site include a continued dialogue with the staff, prompt responses to examiners, a clear understanding of the firm’s custody arrangement and practices, verification with clients and third parties (e.g. custodians or CPAs), and adequacy of compliance policies and procedures.
Exam deficiencies frequently relate to advisers being unaware of a relationship that triggered custody requirements (be sure to inventory your accounts and consider how you’re complying with the custody rule), failure to have the audited financials according to GAAP standards or a general partner not delivering audited financials on time, failure to have a reasonable belief that clients are receiving statements (consider requiring written confirmations), etc. For a full recap of suggestions and reflections from the panel, watch the archived webcast.
UPDATE: Surprise Exam Under Custody Rule Required by December 31st (September 2010)
An investment adviser deemed to have custody and thereby required to obtain a surprise examination under amended rule 206(4)-2(a)(4) must enter into a written agreement with an independent public accountant that provides that the first examination will take place by December 31, 2010 or, for advisers that become subject to the rule after the March 12, 2010 effective date, within six months of becoming subject to the requirement.
According to SEC FAQ I.3 , the surprise exam does not have to be completed by year-end, but must commence on or before December 31st and need to be completed until 120 days after the time chosen by the accountant performing the surprise examination. Read a summary and analysis of the final SEC custody rule and/or the SEC FAQs.
UPDATE: SEC Approves Custody Rule (December 2009)
The Securities and Exchange Commission (SEC) approved the Custody Rule of the Investment Advisers Act of 1940 on December 16th. Overall, the AICPA was in support of the proposed Rule as a means to strengthen investment protections in the U.S. securities markets. AICPA made specific recommendations to the proposed rule amendments, including that the focus of the applicability of the surprise examination requirement be on those advisers that pose the greatest degree of risk. The final rule exempts investment advisers who are deemed to have custody solely because they deduct advisory fees. Read a summary and analysis of the final SEC custody rule. The staff of the Division of Investment Management has also prepared responses to common questions about the custody rule.
ADVOCACY: AICPA Comments on the SEC’s Custody Rule of the Advisers Act of 1940 Proposed Amendments (July 2009)
On July 28, 2009, the AICPA submitted comments to the SEC’s proposed amendments to the Custody Rule of the Advisers Act of 1940. Topics addressed included the scope of advisers subject to both the surprise examination and internal controls examination, scope, guidance and applicable standards specific to each of these examinations, auditor qualifications, as well as independence and cost considerations.