SEC Proposes Auditor Reviews of Custody Arrangements
During its open meeting yesterday, the SEC proposed new rules requiring independent examinations of investment advisers that maintain custody of client assets. The proposals include the requirement to obtain an annual surprise examination by an independent public accountant to verify assets and an annual SAS 70 review of custody controls if assets are held at an affiliate. The SEC has also proposed reporting of deficiencies to the SEC. Under the Advisers Act, an investment adviser could be deemed to have custody any time it has authority to withdraw client funds held by a third party custodian.
OUR TAKE: Adoption of these rule proposals would likely have the effect of eliminating adviser self-custody because it would become too expensive. The most significant impact relates to payment of an adviser’s fees. Rather than simply deducting fees from a client’s account, an adviser would have to invoice the client who would then direct the custodian to pay the invoice.