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WHAT HAS CHANGED?
Last year, the SEC published amendments to its Custody Rule under the Investment Advisors Act of 1940 effective beginning March 12, 2010. Providing quarterly account statements to clients is no longer sufficient:
- An RIA with custody of client assets must undergo an annual surprise examination to verify client assets, even if an independent qualified custodian is involved.
- An RIA using a qualified custodian that is not “operationally independent” must also undergo an examination of internal custody controls.
- An RIA is required to obtain an internal controls examination report from an affiliated custodian even if “operationally independent.”
WHAT IS CUSTODY?
Holding, directly or indirectly, client funds or securities or having any authority to obtain possession of them, including:
- Possession of client funds or securities
- Any arrangement (including power of attorney) under which an advisor is authorized or permitted to withdraw client funds or securities maintained with a custodian upon the advisor’s instruction to the custodian
- Any capacity (i.e., GP of partnership, managing member of LLC, trustee of a trust or comparable position for another type of pooled investment vehicle) that gives an advisor or a supervised person legal ownership of or access to client funds or securities.
An advisor also has custody if a related person holds, directly or indirectly, client funds or securities or has any authority to obtain possession of them, in connection with advisory services the advisor provides to clients.
HOW DOES THIS AFFECT YOU?
Any advisor who is registered with the SEC and has “custody” of client funds or securities, either directly or indirectly by maintaining those funds and securities with a qualified custodian, is likely to be affected. Advisors who operate solely with respect to investment pools (i.e., hedge funds and other limited partnerships) that are subject to an annual audit will generally not be affected, if such funds or partnerships are audited annually.
Affected advisors were required to engage a certified public accountant to complete the first surprise examination no later than December 31, 2010. Examination reports on internal custody controls were required to be obtained within six months of becoming subject to the requirement.
WHO ARE YOUR AUDITORS?
The SEC has mandated that only CPAs who are registered with the PCAOB may perform most of the examinations required by the Custody Rule amendments.
SUMMARY OF KEY CUSTODY RULE PROVISIONS AND COMPLIANCE DATES
The Surprise Exam
The accountant’s procedures for the surprise examination will normally include confirmation of client funds and securities on a sample basis with both the qualified custodian and the client (inclusive of privately offered securities) and confirmation of contributions and withdrawals with clients.
The accountant’s examination report will include an opinion as to whether the advisor was in compliance with the Custody Rule and whether client funds and securities were maintained in a separate account at a qualified custodian for each client under that client’s name or in accounts that only contain client funds and securities under the advisor’s name as agent or trustee for the clients.
Internal Control Report
If a related custodian maintains client assets, the Custody Rule requires an annual independent internal control report prepared by an accountant who is PCAOB registered.
Delivery of Account Statements
The qualified custodian must send an account statement, at least quarterly, to each client for which the qualified custodian maintains funds or securities.
The Custody Rule requires advisors to provide their clients with information regarding the custody arrangements they have established with a qualified custodian and urging clients to compare the account statements they receive from the custodian with those they receive from the advisor.
DECOSIMO CAN HELP
Decosimo is a PCAOB-registered firm, and our Financial Services Group provides tax, audit and advisory services to investment companies both in the U.S. and offshore. Our financial services professionals are eager to provide you with the information you need to navigate the new road ahead and to provide a glimpse into what these examinations will entail.
CONTACT THE DECOSIMO FINANCIAL SERVICES GROUP
Karl Jordan, CPA
| Domestic and International Principal
Marshall Harvey, CPA, CFE
| Assurance Principal
Renee Ford, CPA | Assurance Principal
Brad East, CPA, ABV | Assurance Principal
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