The U.S. Securities and Exchange Commission (SEC) Monday issued alerts to both firms and clients after its compliance examinations turned up significant deficiencies concerning custody issues at investment advisory firms.
The SEC put out a “risk alert” on compliance with its custody rule for investment advisors; and, it also issued a bulletin to investors about the rule, which is designed to protect advisory clients from theft or misuse of their funds and securities.
The alert from the SEC’s Office of Compliance Inspections and Examinations (OCIE) notes that the recent findings of custody deficiencies have resulted in a range of actions, including firms taking remedial measures, such as enhancing their compliance procedures, changing their business practices, or devoting more resources to custody issues. It has also made referrals to enforcement.
The investor bulletin, which was issued by the SEC’s Office of Investor Education and Advocacy, explains the requirements of the custody rule, including the requirement for custodians to send account statements to investment advisory clients at least every quarter. It also stresses that the rule is not a substitute for investors’ oversight and monitoring of their investments.
“Investors should always ask questions — including questions about the custody issues discussed in this Investor Bulletin — when considering an investment,” said OIEA director, Lori Schock. “Asking questions and monitoring investments are key ways to protect yourself from investment fraud.”
The OCIE reports that a review of recent examinations where significant deficiencies were identified showed custody-related issues in about one-third of the firms examined. The deficiencies included: firms failing to recognize that they have custody, such as situations where the advisor serves as trustee, or is authorized to make withdrawals from a client’s account; failure to meet the custody rule’s surprise examination requirements; and, failure to satisfy the rule’s qualified custodian requirements, such as commingling client, proprietary, and employee assets in a single account.
“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,” said SEC chairman, Elisse Walter.
“We take deficiencies in this area very seriously and want to put advisors on alert about the importance of complying with the custody rule,” said OCIE director, Carlo di Florio. “It is a key component of our investment advisor examination program.”