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March 04, 2013 at 10:29 AM
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.”
