More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
Responding to the Bernie Madoff Ponzi scheme--and many more that have been alleged since--the Securities and Exchange Commission issued a proposed rule May 14 that would put tighter controls on investment advisors who maintain custody of their clients' assets.
The proposal promotes what the SEC calls "independent custody," which SEC Chairman Mary Schapiro said at the meeting means "taking the assets out of the control of the advisor or affiliate of the advisor and putting them in the control of a truly independent third-party." The proposed rule would also require "surprise" audits, including those that are PCAOB registered and inspected, as third-party check on "custody controls and client assets," Schapiro said.
Right now, approximately 9,600 SEC registered investment advisers have custody of client assets, in one form or another, Schapiro said, which "means that they either physically control the assets directly or through an affiliate or have the authority to withdraw their clients' funds."
The proposal requires that client assets be maintained with a qualified custodian that is independent of the advisor, Schapiro explained. However, she said, "in the case where an advisor or its affiliate maintains custody of client assets, then a PCAOB-registered and inspected public accountant would have to perform an annual custody control examination."
That accountant would also be required to prepare a report, known as a Type II SAS 70 report, describing the custody controls in place and the tests conducted of their operating effectiveness. Robert Plaze, SEC's associate director for regulation of the Division of Investment Management, SEC staff has also recommended changes to Form ADV which would require advisors "to report who the accountant is and if an accountant is fired." The accountant, he said, would also have to notify the SEC after being fired and cite the reason why.
Schapiro said during the proposed rule's comment period, the SEC would like to hear people's thought on whether the proposed rule will serve to better protect investor assets; will encourage even greater use of independent custodians; and whether the estimated costs associated with the proposals are reasonable and appropriately borne by investment advisors.