More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
Of the 139 advisors that switched from federal to state registration in Massachusetts under the Dodd-Frank Act, only three had been examined by the Securities and Exchange Commission in the years before the law took effect, and the state has found custody infractions among the switching advisors it has examined.
So says a new report released by Massachusetts securities regulator William Galvin. The Massachusetts Securities Division so far has examined half of the Massachusetts-based advisors that switched.
The state says investment advisors’ custody of clients’ funds or securities has been a “common deficiency.”
To this end, Galvin released a policy statement Thursday to make clear that the investment advisors who register with the Division in the wake of the Dodd-Frank Act must follow the “stricter” state rules on reporting when they have custody of client funds.
“In many instances, advisors unknowingly possessed custody of clients’ trust assets due to the advisor or a related person’s position as a trustee of the trust,” according to the report. “Many of the advisors deemed by the Division to have custody failed to disclose that in their regulatory filing, nor have they had a surprise independent audit as required by state rules."
“With the recent Madoff scandal we have all seen the risks that can occur when an adviser abuses custody authority,” said Galvin, in a statement.
The policy statement sets out the Division’s custody requirements and specifically states that the Division does not follow the SEC exemption from custody for appointments of supervised persons of an advisor as executors, conservators or trustees that arise as a result of family or personal relationship with the decedent, beneficiary or grantor.
Advisors directly deducting advisory fees from client accounts are deemed to have custody unless they comply with certain additional requirements, the policy statement says.
The policy statement says that state-registered investment advisors “must comply with the custody rules as spelled out in the federal Investment Advisers Act of 1940, specifically Rule 206(4)-2 which requires, among other things, an annual surprise audit of advisors by an independent public accountant.”
While this will mean additional costs to registered investment advisors, the “cost is outweighed by the additional protections these measures afford to investors,” the Division said.
Check out SEC: Don’t Use ‘Protected’ or ‘Guaranteed’ in Fund Names on ThinkAdvisor.