Insights from the experts in investment fiduciary responsibility.

Fiduciary Links: SEC Taking Closer Look at Custody Issues Due to Early Findings

Posted by fi360 Team on March 11, 2013

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>>>The SEC issued a risk alert last week that highlights a number of deficiencies under the Advisers Act custody rule that have been encountered as part of recent adviser examinations (see the InvestmentNews summary). These include a number of scenarios where the adviser doesn’t realize that it has custody, failing to file for an annual surprise audit of custody practices, client notification problems, commingling problems, problems with audit procedures, and other problems.

From an investor protection standpoint, the SEC is mostly concerned with stopping any new Madoffs from happening by keeping a closer eye on who has access to client funds and that they are being directed properly. For the most part, the violations have been procedural and without any fraudulent intent. Therefore, most of the actions have amounted to simple warnings and directives to beef up procedures.

In addition to the compliance standpoint of simply being aware that the SEC is looking for these issues, advisors should also consider the broader ramifications of not paying close enough attention to the custody rule. If something were to go wrong with a portfolio due to inadequate custody procedures, advisors could find themselves with more liability than they bargained for. Having custody can give rise to fiduciary status and an obligation to closely monitor investor assets. In the case that an advisor doesn’t even realize it has custody, this obviously presents a significant problem in the event that proper protection of assets comes into question.     

Alongside the risk alert for advisers, the SEC also released an investor bulletin that provides guidance to investors on ensuring that custody is handled appropriately by advisors and service providers. Assuming you are taking the right steps to comply with the custody rule, it might be worth sharing this bulletin with your clients and prospects to demonstrate your professionalism.

>>>We repeat this every so often on the blog and on our advocacy page, but contacting your representatives in Congress about the issues that matter most to you does work. This article from InvestmentNews last week credits constituent feedback as a major influence for shelving SRO legislation for the time being. The SRO issue will probably arise again at some point, as will other financial and fiduciary reform efforts, so stay informed and make the effort of letting your representatives know how you feel.

>>>A couple of reminders that we’ll be repeating the next few weeks: 1) If you haven’t already done so, please take a few minutes to complete the fi360-AdvisorOne Fiduciary Standard Survey, which asks advisors of every ilk about their understanding of and feelings about the fiduciary standard; and 2) the submission period for the fi360 Designee Article Competition is now open. If you are an AIF or AIFA Designee and have an interesting in writing about fiduciary topics, submit your article for a chance to win $1,000, be honored at the fi360 Conference in April, and be published by AdvisorOne.

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