Guidance for Self-Custody Surprise Exams Requires Client Verification and SEC Reporting

The SEC has published guidance for independent public accountants performing surprise verification exams under the new custody rule. As part of the exam, the SEC requires the accountant to contact each client to confirm such client’s funds and securities. In the event that the accountant finds “any material discrepancy,” the accountant must notify the SEC within one business day of the finding. Also, the accountant must file all examination reports with the SEC.

OUR TAKE: The hassle and expense alone of the surprise exam should deter firms from engaging in self-custody. Requiring client verification of assets and SEC reporting adds more disincentives.

http://www.sec.gov/rules/interp/2009/ia-2969.pdf