Vista360’s Take on OCIE’s Custody Rule Risk Alert
On March 4, 2013, the SEC’s Office of Compliance Inspections and Examinations (OCIE) staff released a National Examination Risk Alert outlining deficient custody practices it identified during its adviser examinations. Common deficiencies cited during about 1/3 of examinations include:
The Alert encourages Advisers to review their policies and practices in light of the deficiencies identified and their responsibilities under the Custody Rule.
- Failure to recognize that the adviser has custody. This is common in situations where the adviser serves as trustee, is authorized to write or sign checks for clients, or is authorized to make withdrawals from a client’s account in connection with bill-paying services.
- Failure to meet the custody rule’s surprise examination requirements.
- Failure to satisfy the custody rule’s qualified custodian requirements, which included commingling client, proprietary, and employee assets in a single account and not having a reasonable basis to believe that a qualified custodian is sending quarterly account statements to the client.
The SEC is still reeling from the public relations nightmare that accompanied the Madoff Ponzi scheme, and it shows no sign of letting up on its focus on custody issues. In fact, Drew Bowden (head of the SEC’s National Examination Program) recently referenced Custody as a perennial issue and area of focus for the SEC.
What to do?
Please do not hesitate to contact us with questions, or if you require further advice regarding the SEC’s Custody Rule.
- Read the Custody Rule – particularly if you: 1) manage a private fund; 2) serve as trustee to your clients’ accounts; or 3) are authorized to access your clients’ bank accounts.
- If you require a surprise examination, ensure it is a surprise. We understand one of the SEC staff’s concern is a “surprise” exam is often a surprise in name only. If you know the exam is coming then it is not a surprise.
- NEVER commingle client with proprietary or employee assets, as a general rule.
- Implement procedures to establish a reasonable basis to believe that the custodian is indeed sending quarterly account statements. One practice to consider adopting: forward a simple letter of instruction to each custodian (attaching a list of your common clients) directing them to forward an original custodial statement to the clients at least quarterly. Specify within the letter that the custodian is to notify you if the custodian is not able to meet your request.