Many financial advisors and their firms fail to understand and comply with custodial responsibilities to clients, according to the SEC . As a result, the commission has issued a “risk alert” and “advisor bulletin” to remind and educate planners about the importance of complying with custody rule.

“We take deficiencies in this area very seriously and want to put advisors on alert about the importance of complying with the custody rule,” Carlo V. di Florio, director of the SEC’s Office of Compliance and Inspections, said in a statement.  “It is a key component of our investment adviser examination program.” 

The findings came after di Florio’s office reviewed recent examinations of financial planners that turned up significant deficiencies. About 140 firms, representing a third of the firms reviewed, showed custody related issues, according to the commission.

In these instances, the SEC said, the financial advisors:

  • Failed to recognize that they have custody over client assets. This can occur when a planner serves as trustee over client assets and is authorized to write or sign checks for clients. Also, in this case a planner often is authorized to make withdrawals from a client’s account as part of bill-paying services.
  • Failed to meet the custody rule’s surprise examination requirements.
  • Failed to satisfy the custody rule’s qualified custodian requirements. This can occur when a planner commingles client, proprietary and employee assets in a single account. It also can happen when a planner lacks a reasonable basis to believe that a qualified custodian is sending quarterly account statements to the client.

In addition, some financial planners who advise on audited pooled investment vehicles failed to hire an independent accountant and demonstrate that financial statements were distributed to all fund investors, the study found.
“Because the safeguarding of assets is central to investor protection, it is critical that investment advisers follow our rules when they maintain custody of their clients’ funds,” SEC Chairman Elisse B. Walter said in the same statement.

The deficiencies in question have resulted in a range of actions, according to the commission. These included remedial measures, such as drafting, amending or enhancing written compliance procedures, policies or processes. Other actions included changing business practices or devoting more resources or attention to custody issues. di Florio’s office recommended some of the worst cases to the SEC’s Division of Enforcement.

To remain in compliance, custodians must send account statements to investment advisory clients at least every quarter, according to the SEC bulletin. But, this doesn’t relieve investor from the responsibility of being alert to potential fraud, according to the statement.

“Investors should always ask questions – including questions about the custody issues discussed in this Investor Bulletin – when considering an investment,” said Lori Schock, director of the SEC Office of Investor Education and Advocacy, which produced the bulletin.  “Asking questions and monitoring investments are key ways to protect yourself from investment fraud.”

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access