In view of the Madoff scandal, the SEC’s Office of Compliance Inspection and Examinations announced that they will be looking more closely at the custody and safekeeping of client assets. In addition, the SEC on May 14, 2009, unanimously voted to propose rulemaking designed to provide additional safeguards under the Investment Advisers Act of 1940 when an adviser has custody funds or securities.
The OCIE recently announced that as part of their examinations of registered advisers and broker-dealers, they will be seeking confirmation of accounts not only from independent custodians “up the chain,” but also from advisory clients “down the chain.” According to OCIE Associate Director Gene Gohlke, the SEC may send advisory clients a letter asking them to confirm their account balances as of a certain date and that transactions were authorized by them. The SEC’s intent to contact clients directly has worried some advisers, who fear that their clients will assume the adviser is being investigated by the SEC. To ease those fears, the SEC promised that it would release to the public the form of letter it intends to send to advisory clients, as well as a model letter which advisers can use to notify clients that the SEC may be contacting them to verify account holdings and transaction information. The model letter and form are now available on the SEC’s website.
In addition, the SEC is proposing amendments to the custody rule under the Advisers Act and related forms that, among other things, would:
- require advisers that have custody of client funds or securities to undergo an annual surprise examination by an independent public accountant;
- where client accounts are not maintained by an independent qualified custodian (i.e., a custodian other than the adviser or a related person), require the adviser or related person to 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; and
- provide the SEC with better information about the custodial practices of registered advisers.
The comment period for the proposed rulemaking ends on July 28, 2009.