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Representing Individual, High Net Worth & Institutional Investors

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Is Your Adviser Mishandling Your Assets?

The Securities and Exchange Commission (SEC) is warning investors that it has found “significant deficiencies” in the way in which investment advisers handle the custody of client assets.

The SEC issued an risk alert and investor bulletin on its exam findings yesterday in which the regulator said that one-third of the investment advisers who underwent government examinations had compliance problems with a key rule designed to protect clients from theft or misuse of their money. Among the advisers’ deficiencies cited by the SEC:

  • Failure to recognize that they have custody, such as 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 as part of bill-paying services.
  • Failure to meet the custody rule’s surprise examination requirements.
  • Failure to satisfy the custody rule’s qualified custodian requirements, for instance, by      commingling client, proprietary, and employee assets in a single account, or by lacking a reasonable basis to believe that a qualified custodian is sending quarterly account statements to the client.
  • For advisers to audited pooled investment vehicles, the SEC examinations found that some failed to meet requirements to engage an independent accountant and demonstrate that financial statements were distributed to all fund investors.

Some of the problems found by the SEC have been referred to the agency’s enforcement division for investigation.

“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,” said SEC Chairman Elisse B. Walter.

“We take deficiencies in this area very seriously and want to put advisers on alert about the importance of complying with the custody rule,” added OCIE Director Carlo V. di Florio. “It is a key component of our investment adviser examination program.”

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