CUSTODY RULES FOR REGISTERED INVESTMENT ADVISERS!
Investment Advisers are required to obtain an annual surprise examination by an independent public accountant registered with and inspected by the Public Company Accounting Oversight Board. The annual examination is to take place by December 31.
In response to the Madoff Ponzi scheme and other high profile fraud cases, the Securities and Exchange Commission (the SEC) instituted changes to its custody rules that apply to Registered Investment Advisers. The SEC has amended its custody rule, Rule 206(4)-2, under the Investment Advisers Act of 1940 which directly applies to investment advisers who fall under Rule 206(4)-2 and are registered with the SEC. Our Financial Services Practice Group can assist you with satisfying this surprise examination requirement.
The rule requires registered advisers with custody of client assets to engage an independent public accountant to conduct an annual surprise examination of client assets, by December 31. Advisers subject to the surprise examination must enter into a written agreement with an independent public accountant to conduct the examination. The agreement, among other things, must require the accountant to notify the SEC within one business day of finding any material discrepancy during the course of the examination and to submit Form ADV-E electronically with the SEC through the Investment Adviser Registration Depository system within 120 days of the surprise examination.
Investment advisers registered with the SEC that have custody of client securities or funds are subject to the custody rule. For purposes of the rule, "custody" means holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them. The custody rule generally requires advisers with custody of client assets to maintain client funds or securities with a "qualified custodian" (such as a bank, registered broker-dealer) and mandates certain reporting to clients and the SEC.
The final rule requires that an adviser or a related individual, who serves as a qualified custodian for client funds or securities, must obtain or receive an internal control report, which includes an opinion from an independent public accountant with respect to its custodial controls relating to client assets. The independent public accountant issuing the internal control report must be registered with the Public Company Accounting Oversight Board (the PCAOB) and must verify that client funds and securities are reconciled to a custodian other than the adviser or its related individual.
Vavrinek, Trine, Day & Co., LLP has been a leading provider of audit, tax, and advisory services for over 60 years, with seven offices in California and employing over 200 professionals. We are registered with the PCAOB and our staff includes seasoned CPAs, Certified Internal Auditors and Certified Fraud Examiners.
To learn more about our firm and how we can assist you with meeting the custody audit requirements, please contact Lynelle Jarschke at your earliest convenience.