Tag: Custodians

SEC Releases Proposed Custody Rules for Investment Advisers

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On May 14, the Securities Exchange Commission said they were proposing New Custody Rules for Investment Advisers. They summarized the proposed rules but did not release the actual text of the proposed rules.

Now the proposed rules are available in Release No. IA-2876 (.pdf). Comments must be received on or before July 28, 2009.

SUMMARY: The Securities and Exchange Commission is proposing amendments to the custody rule under the Investment Advisers Act of 1940 and related forms. The amendments, among other things, would require registered investment advisers that have custody of client funds or securities to undergo an annual surprise examination by an independent public accountant to verify client funds and securities. In addition, unless client accounts are maintained by an independent qualified custodian (i.e., a custodian other than the adviser or a related person), the adviser or related person must obtain a written report from an independent public accountant that includes an opinion regarding the qualified custodian’s controls relating to custody of client assets. Finally, the amendments would provide the Commission with better information about the custodial practices of registered investment advisers. The amendments are designed to provide additional safeguards under the Advisers Act when an adviser has custody of client funds or securities.

The proposed rule is a sign of re-regulation in the industry. Some of the proposed rules were in place prior to 2003, when they removed through de-regulation. (Investment Advisers Act Release No. 2176, September 25, 2003 [68 FR 56692]).

The proposed rules are amendments to Rule 206(4)-2 [17 CFR 275.206(4)-2], Rule 204-2 [17 CFR 275.204-2] under the Investment Advisers Act of 1940 [15 U.S.C. 80b] (the “Advisers Act” or “Act”), to Form ADV [17 CFR 279.1], and to Form ADV-E [17 CFR 279.8].

New Custody Rules for Investment Advisers

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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.

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