Wednesday, March 6, 2013

Reviewing Advisor Custody Issues

Seal of the U.S. Securities and Exchange Commi...
The SEC has just released a Risk Alert calling attention to the results of its recent examinations of investment advisor firms. Incredibly, the SEC found that 1/3 of the firms that were reviewed had significant issues with custody of their customers' securities.

The SEC found that a significant number of firms did not even realize that they had "custody" of a client's funds or securities within the meaning of the custody rule (Rule 206(4)-2 under the Advisers Act). According to the Alert, the SEC found advisors failing to comply with the custody rule in the following circumstances:

  • The Role of Employees or Related Persons:The adviser’s personnel or a “related person” serve as trustee or have been granted power of attorney for client accounts.

  • Bill Paying Services: The adviser provides bill-paying services for clients and, therefore, is authorized to withdraw funds or securities from the client’s account

  • Online Access to Client Accounts: The adviser manages portfolios by directly accessing online accounts using clients’ personal usernames and passwords without restrictions and, therefore, has the ability to withdraw funds and securities from the clients’ accounts

  • Adviser Acts as a General Partner: The adviser serves as the general partner of a limited partnership or holds a comparable position for a different type of pooled investment vehicle.

  • Physical Possession of Assets: The adviser has physical possession of client assets, such as securities certificates.

  • Check Writing Authority: The adviser or a related person has signatory and check writing authority for client accounts.

  • Receipt of Checks Made to Clients: The adviser received checks made out to clients and failed to return them promptly to the sender
Advisors who have actual, physical custody of securities, as well as advisors in these situations, must comply with the custody rules. Failing to do so can have significant ramifications for the advisors, and places customer funds at risk.

If you have any questions or concerns regarding compliance with the custody rule, or any other rule or regulation under the Investment Advisers, send us an email. Our attorneys have decades of experience in securities regulation and compliance and include former in-house attorneys and former SEC enforcement attorneys. Email us at with your questions or concerns.

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