Requirement

Advisers with custody of client assets are required to undergo a surprise examination of those assets by an independent public accountant.

Objective

The objective of the accountant’s examination is to verify that client funds and securities of which an investment adviser has custody are held by a qualified custodian in a separate account for each client under that client’s name, or in accounts that contain only clients’ funds and securities, under the investment adviser’s name as agent or trustee for the clients.

PCAOB Registration and Inspection

The surprise examination must be conducted by an independent public accountant that is registered with, and subject to regular inspection by, the Public Company Accounting Oversight Board (“PCAOB”).

Surprise Audit

The accountant should obtain from the investment adviser records that detail client funds and securities of which the investment adviser has custody and the identification of the qualified custodian(s) of those funds and securities. The accountant should also obtain records of accounts that were closed during the period or that have a zero balance as of the date of the examination.

For a sample of client accounts, the accountant should obtain records of the purchases, sales, contributions, withdrawals and any other debits or credits to each selected client’s account occurring since the date of the last examination. The accountant’s procedures to meet the objective of the examination should normally include, but are not limited to, the following with respect to each selected client account:

• Confirmation with the qualified custodian(s) of client funds and securities as of the date of the examination and that the client’s funds and securities are held in either a separate account under the client’s name or in accounts under the name of the investment adviser as agent or trustee for clients;
• Confirmation with the client of funds and securities held in the account as of the date of the examination and contributions and withdrawals of funds and securities to and from the account since the date of the last examination; where confirmation replies are not received, the accountant should perform alternative procedures; and
• Reconciliation of confirmations received and other evidence obtained to the investment adviser’s records.

Commission Reporting

Under amended rule 206(4)-2, each investment adviser subject to the surprise examination requirement must enter into a written agreement with an independent public accountant to conduct the surprise examination. The agreement must require the accountant, among other things:

• To submit Form ADV-E via the IARD system to the SEC accompanied by the accountant’s certificate within 120 days of the time chosen by the accountant for the surprise examination, stating that the accountant has examined the funds and securities and describing the nature and extent of the examination;
• To notify the SEC within one business day of finding any material discrepancy during the course of the examination; and
• To file via the IARD system, upon dismissal or resignation within four business days a statement regarding the termination along with Form ADV-E.

This entry was posted on Monday, February 15th, 2010 at 7:58 am and is filed under Custody. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.