Massachusetts Regulator Finds Custody Infractions Among Switching Advisors

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.