Reviewing Advisor Custody Issues

The SEC has just released a Risk Alert calling attention to the results of its recent examinations of investment advisor firms. Incredibly, the SEC found that 1/3 of the firms that were reviewed had significant issues with custody of their customers' securities.

The SEC found that a significant number of firms did not even realize that they had "custody" of a client's funds or securities within the meaning of the custody rule (Rule 206(4)-2 under the Advisers Act). According to the Alert, the SEC found advisors failing to comply with the custody rule in the following circumstances:

• The Role of Employees or Related Persons:The adviser’s personnel or a “related person” serve as trustee or have been granted power of attorney for client accounts.

• Bill Paying Services: The adviser provides bill-paying services for clients and, therefore, is authorized to withdraw funds or securities from the client’s account

• Online Access to Client Accounts: The adviser manages portfolios by directly accessing online accounts using clients’ personal usernames and passwords without restrictions and, therefore, has the ability to withdraw funds and securities from the clients’ accounts

• Adviser Acts as a General Partner: The adviser serves as the general partner of a limited partnership or holds a comparable position for a different type of pooled investment vehicle.

• Physical Possession of Assets: The adviser has physical possession of client assets, such as securities certificates.

• Check Writing Authority: The adviser or a related person has signatory and check writing authority for client accounts.

• Receipt of Checks Made to Clients: The adviser received checks made out to clients and failed to return them promptly to the sender

Advisors who have actual, physical custody of securities, as well as advisors in these situations, must comply with the custody rules. Failing to do so can have significant ramifications for the advisors, and places customer funds at risk.

If you have any questions or concerns regarding compliance with the custody rule, or any other rule or regulation under the Investment Advisers, send us an email. Our attorneys have decades of experience in securities regulation and compliance and include former in-house attorneys and former SEC enforcement attorneys. Email us at astarita@beamlaw.com with your questions or concerns.

RIA State Registration Deadline Approaches

This Thursday is the deadline for mid-sized RIAs who no longer meet the $90 million AUM number to register with their states rather than the SEC, and it appears that many have not done so. Financial-planning.com sys that hundreds of medium-size RIAs are procrastinating and have not made their state registrations.

Despite numerous messages from the SEC, it appears that many advisors have not made the registration filings, and there is no guarantee that the state will accept the filings, even if filed on time.

With roughly 2,500 RIAs affected by the change in registration requirements, there could be a signficant number who are going to be late, and who may face issues with not being registered with any regulator, a potential violation of state and federal law.

If you are one of the firms that has not made your state filings, contact us at info@seclaw.com and we will see if we can assist you with your registration, or help you find someone to help you with the process.

Financial-planning.com has more details at Procrastinating RIAs Could Face SEC De-Registration