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Regulation and Compliance > Federal Regulation > SEC

SEC verifying client assets

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The SEC is giving a heads up to investment advisors, saying it is now contacting clients and other third parties to verify client assets managed by the advisor.

In a letter to the Investment Adviser Association, Gene Gohlke, associate director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), informs advisors of the new practice, saying “in order to perform a valid verification of assets, the staff must request independent confirmation of investor assets from various third-parties,” including clients, derivative counterparties, hedge fund investors, custodians, DTCC, and auditors. In these requests, exam staff will seek confirmation of cash and securities held by a sample of advisory clients as of a specific date and confirmation of transactions in such accounts over a period of time.

“The SEC is taking a number of proactive steps to address issues arising from the Madoff fraud,” said IAA Executive Director David Tittsworth in a prepared statement. “Contacting clients and other third parties to verify account balance information is an additional check that can be used in routine examinations to detect potentially fraudulent activities. We are pleased that the SEC has informed us so that advisers and their clients do not misconstrue this new examination practice.”

The IAA emphasizes that the letter “should not be considered as an indication by the SEC that any violations have occurred and should not reflect adversely on the adviser. Exam staff’s letter to clients seeking account confirmation will also ‘make clear that the request should not be construed as a reflection on the adviser or that any violation of the law has occurred.’ OCIE also re-affirms that both its examinations and its communications with clients and other third parties during exams are non-public.”


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