Ashland provides surprise custody examinations to Registered Investment Advisers (RIA) subject to the Custody Rule. Registered with the PCAOB, Ashland is one of the most well-known accounting firms specializing in the investment management industry. Our role as the leading provider of GIPS verification and regulatory consulting has resulted in a thorough understanding of your operations that will facilitate an efficient and effective custody examination.
1.
The
Requirement
RIAs that have custody are required to obtain an annual surprise examination. An RIA is deemed to have custody if they directly or indirectly hold client funds or securities, or have authority to obtain possession of them. This may include (see exemptions below):
- Accounts for which RIA has ability to withdraw or have access to client funds or securities;
- Assets indirectly or directly held by a related party; or
- Acting as general partner for a limited partnership or manager of a limited liability company.
If the RIA or related party is the custodian, the surprise examination must be conducted by an independent account firm registered with the Public Company Accounting Oversight Board (PCAOB).
On December 30, 2009, the Securities and Exchange Commission (SEC) released its final amendments to Rule 206(4)-2 of the Investment Advisers Act of 1940 (the Amended Rule). The amendments, effective March 12, 2010, are intended to better safeguard client funds held by RIAs.
Custody as defined by the current and amended rule means, holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them. You have custody if a related person holds, directly or indirectly, client funds or securities, or has any authority to obtain possession of them, in connection with advisory services you provide to clients. Custody includes:
- Possession of client funds or securities (but not of checks drawn by clients and made payable to third parties) unless you receive them inadvertently and you return them to the sender promptly but in any case within three business days of receiving them;
- Any arrangement (including a general power of attorney) under which you are authorized or permitted to withdraw client funds or securities maintained with a custodian upon your instruction to the custodian; and
- Any capacity (such as general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives you or your supervised person legal ownership of or access to client funds or securities.
The custody rule previously required that an RIA with custody of client assets:
- maintain the assets with a qualified custodian, such as a broker-dealer or bank;
- notify clients of certain information if the RIA opens an account with a custodian on the clients behalf; and,
- have a reasonable belief that the qualified custodian sends account statements directly to clients or, alternatively the RIA sends quarterly statements to clients and undergoes an annual surprise audit.
In order to strengthen the custodial controls on RIAs with custody of client funds or securities, the Amended Rule provides that registered investment RIAs with custody of client funds or securities (with significant exceptions) is required, among other things:
- maintain the assets with a qualified custodian in a separate account for each client under that clients name; or in accounts that contain only your clients funds and securities, under your name as agent or trustee for the clients;
- notify clients of certain information if the RIA opens an account with a custodian on the clients behalf and following any changes to this information. If you send account statements to client, include in the notice and in any subsequent account statement a statement urging the client to compare the account statements from the custodian with those from the RIA;
- have a reasonable belief, after due inquiry, that qualified custodian sends account statement at least quarterly to clients for which it maintains funds or securities;
- undergo an annual surprise examination by an independent public accountant to verify client assets; and,
- unless client assets are maintained by an independent custodian, to undergo an annual surprise examination and to obtain a report of the custodians internal controls relating to the custody of those assets (typically a SAS-70 Report) both from an independent public accountant registered with the Public Company Accounting Oversight Board (PCAOB).
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