Custody Rule Compliance—How to Avoid Deficiencies

Author: Andrew K. Sledd, CPA, CFE, Manager, Business Assurance and Advisory Services

In the wake of billions of dollars stolen from investors in several large and highly publicized Ponzi schemes, books and records compliance as well as segregation of client funds are being highly scrutinized by regulators.

Certain investment advisers and broker/dealers registered with the Securities and Exchange Commission (SEC) and deemed to have custody of client assets are required to engage a certified public accounting firm to complete an examination of their books and recordkeeping associated with client assets. All investment advisers should seek advice from compliance professionals to determine if they are deemed to be a “qualified” custodian and are subject to the custody rules.

Important requirements of the examinations include:

• The adviser should ensure the accounting firm engaged to perform the examination is registered with the Public Company Accounting Oversight Board (PCAOB.)
• Examinations are required to be a “surprise” with the date not known by the adviser until the initial requests are made by the accountant.

The SEC has found deficiencies in the way these examinations are being conducted. Sarah Lynch’s article on Reuters, SEC Finds Laws in Advisers’ Compliance with Custody Rules, offers good insight into some of the pit falls discovered by the SEC in their compliance review of accounting firms. The article highlights the importance of selecting an experienced and qualified accounting firm to perform these exams efficiently.

If you have any questions on this topic or how it may affect your business, please feel free to contact us. information@keitercpa.com or call 804.747.0000.