Risk Alert: Custody Rule (206(4)-2) Noncompliance

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By Chris Wallace, CPA 

The National Examination Program of the SEC's Office of Compliance Inspections and Examinations has issued a Risk Alert reporting widespread noncompliance with the custody rule (206(4)-2). The custody rule regulates when an adviser is deemed to have custody of client assets and what steps it must take to protect those assets. The NEP reports that it uncovered custody violations in one-third of recent exams. The deficiencies generally involving advisers' failure to understand that they had custody of client assets, comply with the surprise exam requirement, engage a qualified custodian, and deliver qualifying financial statements for pooled investment vehicles. In particular, the NEP cited the following violations: adviser personnel with powers of attorney or serving as trustee; check-writing and bill-paying authority; online account access; physical possession of stock certificates; surprise exams that were not a surprise; commingling of client assets in one account; using accountants that were not independent or PCAOB registered; and fund financial statements that were not prepared in accordance with GAAP. The NEP has referred cases to the Enforcement Division and has also ordered remedial measures including allocation of additional resources to custody compliance.

About the Author

Chris is a member of the Firm’s Financial Services Industry Team, and specializes in serving the Firm’s broker dealer, hedge fund, private equity fund, real estate fund, and other financial service clients. Chris has over 20 years of experience in public accounting providing audit and consulting services to clients in various industries. He is the Practice Leader of Keiter’s Business Assurance and Advisory Services Group.

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.


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