SEC Provides 206(4)-7 Guidance with Custody Rule Release
In the Release accompanying the new adviser compliance rule, the SEC has recommended policies and procedures for upgrading a firm’s Rule 206(4)-7 compliance program to account for the new rule’s requirements. The SEC recommends that advisers with custody of client assets conduct background checks of employees that have access to client assets, require the authorization of at least two persons to move assets, and segregate duties of advisory personnel from custody personnel. The SEC also recommends that firms account for inadvertent custody as a result of an advisory employee having custody as a result of a trustee or power-of-attorney relationship. The SEC recommends that the CCO test reconciliation of account statements against custodial statements and test reconciliation of client addresses. Policies and procedures should also require testing of fee calculations.
OUR TAKE: The SEC rarely gives direct instruction (guidance) on recommended polices and procedures under Rule 206(4)-7. Although the SEC allows variations given a firm’s circumstances, advisers should seriously consider implementing the SEC’s recommendations.