The Securities and Exchange Commission proposed rule amendments as part of their Open Meeting on May 14, 2009. They talked about the proposed rules, but have not actually made them available. It is hard to judge the potential impact of the rules with being able to see them.
According to the press release and the speech by Mary Schapiro here is a summary of the proposed rules:
- All registered investment advisers with custody of client assets will undergo an annual “surprise exam” by an independent public accountant to verify those assets exist.
- If you are an investment advisers whose client assets are not held or controlled by a firm independent of the adviser, you will be required to obtain a SAS-70 report that describes the controls in place, tests the effectiveness of those controls, and provides the results of those tests.
- You would be required to disclose in public filings with the SEC the identity of the independent public accountant that performs your “surprise exam.”
- The proposed rules would require that all custodians holding advisory client assets directly deliver custodial statements to the clients instead of through the investment adviser, and that advisers opening custody accounts for clients instruct those clients to compare account statements they receive from the custodian with those received from the adviser.
According to Commissioner Schapiro: “We are taking this action in response to major investment scams — such as Madoff — and many other potential Ponzi schemes.”
Public comments on the proposed rule amendments must be received by the Commission within 60 days after their publication in the Federal Register.
References:
- Video of Mary Schapiro proposing new rules at SEC Open Meeting
- Text of Mary Schapiro’s presentation at SEC Open Meeting
- SEC Press Release – SEC Proposes Rule Amendments to Strengthen Safeguards of Investor Funds Controlled by Investment Advisers
- Speech by Commissioner Troy A. Paredes at SEC Open Meeting
Doug,
Thanks for pointing out the rules under consideration. I suspect these rules will become law soon after the comment period passes.
What some Investment Advisers need to be aware of are the potential scenarios were advisers actually may be deemed to have custody of funds, even if they don’t know it. This is most common when advisers ask clients for their login password information for held-away accounts.
If the held-away accounts allow logged-in users to change the address of record and request a distribution of funds, then advisers who keep these login credentials on file may be deemed to have custody & possession of funds.