The Securities and Exchange Commission on Monday warned that it has found “significant deficiencies” in the way that investment advisers are handling the custody of client assets.
In an investor alert, the agency said that in recent examinations, custody-related problems were identified in one-third of the firms reviewed, or about 140 firms. Advisers have failed to recognize that they maintain control of their clients’ assets, mixed together client, proprietary and employee assets in a single account and fallen short of surprise-exam requirements.
Advisers cited by the SEC have had to change their custody compliance policies and procedures, modify their business practices or devote more resources to custody issues. In some cases, the examiner has referred the incident to the SEC’s Division of Enforcement.
“Because the safeguarding of assets is central to investor protection, it is critical that investment advisers follow our rules when they maintain custody of their clients’ funds,” SEC Chairman Elisse Walter said in a statement.
In the same news release, Carlo di Florio, director of the SEC’s Office of Compliance Inspections and Examinations said: “We take deficiencies in this area very seriously and want to put advisers on alert about the importance of complying with the custody rule. It is a key component of our investment adviser examination program.”
Most investment advisers house their clients’ assets with a third-party custodian such as Charles Schwab & Co. or TD Ameritrade Inc. The $65 billion Ponzi scheme perpetrated by Bernard Madoff in part revolved around the fact that Mr. Madoff’s firm maintained custody of his clients’ money.