SEC OCIE Finds Custody-Related Deficiencies Involving Investment Advisers

According to the Securities and Exchange Commission Office of Compliance Inspections and Examinations, it discovered “significant deficiencies” related to custody issues with a third of the investment advisers that it examined, including:

• Failure of an investment adviser to recognize when it has custody • Failure to satisfy the rule’s surprise exam requirements • Failure to fulfill the rule’s qualified custodian requirements
Custody by investment advisers refers either to the holding of securities or client funds or the authority to possess them, including the power of attorney to get securities or funds from client accounts. The 1940 Investment Advisers Act’s Rule 206(4)-2 regarding custody prescribes specific requirements for client asset safety.

According to SEC Chairman Elisse B. Walter, it is important for investment advisers to follow this rule, which pertains to the custody of client funds and is supposed to protect investors. Per the custody rule, which is supposed to strengthen safeguard for client assets, SEC-registered investment advisers must:

• Use “qualified custodians” to hold the assets of clients. These custodians can be registered brokerage firms, banks, futures commissions merchants, or specific foreign entities.

• Provide written notice to clients providing details of who is holding their assets and how they are being held.

• Send clients accounts statements that provide details of their holdings at least every quarter. This lets clients oversee their investments and look at their holdings.

• Agree in writing to an annual surprise exam by an independent public accountant each year.

• Provide additional protections when a related qualified custodian is involved.

Investor Due Diligence
If you are an investor setting up an investment account with an adviser, you should:

• Inquire about custody arrangements and make sure you understand how everything works.

• Make sure you get account statements from your qualified custodian at least once a quarter.

• Contact the custodian and the investment adviser if you notice a discrepancy between the account statements that you received from each of them.

If you believe you were the victim of investment fraud, contact Shepherd Smith Edwards and Kantas, LTD, LLP today.

Read the SEC Alert (PDF)

Read the SEC’s Bulletin to Investors

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Deutsche Bank Settles Massachusetts CDO Case for $17.5 Million, Stockbroker Fraud Blog, April 1, 2013

Galleon Group Founder’s Brother Pleads Not Guilty to Insider Trading, Institutional Investment Fraud Blog, April 2, 2013