Compliance Failures Identified in New SEC Risk Alert on Adviser Custody

The SEC recently released a Risk Alert that reveals significant deficiencies related to custody at advisers. National Exam Program (NEP) staff found that some advisers fail to understand when they have custody. An adviser is deemed to have custody and control of client assets whenever they have the ability to access client funds or securities directly, even if the client authorized. If an employee or related person of an advisory firm has custody of just one client account then the firm itself is deemed to have custody of client assets.

Common ways in which advisory firms obtain custody:

  • The firm or an employee or related person of the firm serves as trustee or power of attorney on client accounts
  • Most private fund advisers are deemed to have custody due to the relationship between the adviser and the general partner (shared control persons)
  • Bill-paying services offered by advisers that give direct access to client funds
  • Physical stock certificates held in a vault at the adviser’s office or a safe deposit box in the name of the adviser or related person
  • Receiving and holding any client check for more than 3 days

Staff deficiencies found during recent adviser examinations:

  • Failure to file Form ADV-E for surprise examinations even though the examination took place as required
  • “Surprise” exams taking place close to the same date every year – no real “surprise”
  • Commingling of funds – employee, adviser, and client funds in one account
  • Advisers not checking with the qualified custodian to determine if and when client statements were delivered to clients
  • Failing to include a written statement on adviser-produced statements notifying clients to compare the adviser’s statement with the statement provided by the qualified custodian
  • For private fund advisers, failing to maintain evidence that the audited financials were delivered to all fund investors on a timely basis
  • Firms hiring auditors that were not PCAOB registered

View the SEC’s NEP Risk Alert