Investor Advisory Custody Audits

As a response to high profile fraud cases such as the Madoff Ponzi scheme and others, the Securities and Exchange Commission (SEC) instituted sweeping changes to its custody rules applying to Registered Investment Advisers (RIAs). The SEC amended its custody rule, Rule 206(4)-2 under the Investment Advisers Act of 1940, which applies directly to investment advisers who fall under this rule and are registered with the SEC. This is essentially a surprise annual examination, which must take place by December 31, and which investment advisers are required to obtain by an independent public accountant registered with and inspected by the Public Company Accounting Oversight Board. We are highly qualified to complete this surprise examination requirement on your behalf.

To put a finer point on it, the rule mandates that registered advisers with custody of client assets engage an independent accountant to accomplish the above, and must enter into a written agreement with the accountant to conduct the examination. The agreement required the accountant to notify the SEC within one business day of finding any material discrepancy during the course of the examination and, further, submit Form ADV-E electronically with the SEC through the Investment Adviser Registration Depository (IARD) system within 120 days of the surprise examination.

The independent accountant must submit investment advisers registered with the SEC that have custody of client securities or funds, who are are subject to the custody rule. For purposes of the rule, “custody” means holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them. The custody rule generally requires advisers with custody of client assets to maintain client funds or securities with a “qualified custodian” (such as a bank or registered broker-dealer) and mandates certain reporting to clients and the SEC.