More On Legal & Compliancefrom The Advisor's Professional Library
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
- Books and Records Rule Thorough and complete books and records enable RIAs to demonstrate that they have fulfilled their fiduciary obligations to clients and complied with applicable rules and regulations.
After noticing “significant violations” during recent exams, the Securities and Exchange Commission issued Monday a risk alert on compliance with its custody rule for investment advisors as well as an investor bulletin about the rule.
The alert, issued by the Office of Compliance Inspections and Examinations (OCIE), comes after the SEC exam staff says that of exams that found significant deficiencies, a third of them, or about 140 exams, found custody-related issues. The advisors’ deficiencies included:
—Failure to recognize that they have custody, such as situations where the advisor 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.
For advisors to audited pooled investment vehicles, the SEC says that examinations found “some failed to meet requirements to engage an independent accountant and demonstrate that financial statements were distributed to all fund investors.”
SEC Chairwoman Elisse Walter said in a statement that “Because the safeguarding of assets is central to investor protection, it is critical that investment advisors follow our rules when they maintain custody of their clients’ funds.”
Carlo di Florio, director of OCIE, said in the same statement that the SEC “takes deficiencies in this area very seriously and want to put advisors on alert about the importance of complying with the custody rule. It is a key component of our investment advisor examination program.”
The alert notes that the recent findings of custody deficiencies have resulted in a range of actions. These included remedial measures by advisors, 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.