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Alternative Market Briefing

One third of firms examined by the SEC on custodial requirements show problems, including improperly comingled funds

Tuesday, March 05, 2013

Bailey McCann, Opalesque New York: The Securities and Exchange Commission (SEC) has issued a new risk alert to investors following red flags turned up during the last round of examinations. The alert by the SEC’s Office of Compliance Inspections and Examinations (OCIE) comes after a review of recent examinations where significant deficiencies were identified showed custody-related issues in about one-third of the firms examined. The SEC has also issued an investor bulletin on the issues it uncovered during examination, with a heavy focus on basic definitions.

Advisers lack of understanding on issues of custody were notable, specifically that many firms could not meet the surprise examination requirements, or did not know that they had custody, including situations where the adviser serves as trustee, is authorized to write or sign checks for clients, or is authorized to make withdrawals from a client’s account as part of bill-paying services.

Another red flag was the discovery that many firms are inappropriately co-mingling customer accounts outside of custodial guidelines. Examinations showed that firms were comingling client, proprietary, and employee assets into a single account. Examiners also often lacked sufficient information to believe that firms were sending required quarterly statements to ......................

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