As I hope you are all now well aware, changes to the SEC Custody rule requires advisers to conduct “due inquiry” as a basis for forming a reasonable belief that their clients’ qualified custodian sends out at least quarterly account statements. You should also now be aware, in a bit of backward looking thinking, that the SEC believes that if clients’ receive paper account statements via regular mail, that due inquiry can only be formed if the investment adviser is copied on the correspondence and receives a copy of the statement. Many advisers are displeased with this arrangement as they have made great efforts to go paperless. However, being good citizens and not wanting to run afoul of the SEC, they have begun to contact their custodians to arrange to be copied on such statements. One major custodian told an investment adviser client of mine that “since they were the entity that had the custody and that they sent out the account statements, that the adviser did not need to be copied on the statements.”  Not only does this show a total ignorance of the revised custody rule, it also points out a very important issue that some advisers rather not know about. That is, those advisers that have an affiliation (affiliation with a small “a”) with a custodian/broker-dealer by virtue of also being a registered representative of that custodian/B-D, often rely too much on that custodian/B-D for compliance matters. I have seen on one more than one occasion that come SEC audit time, the adviser has looked to the custodian/B-D for the “promised” compliance help and such help has been nowhere to be found. The moral being: don’t rely too much on the custodian/B-D because 1. they do not always have  a full understanding of investment adviser rules and 2. they will never ever take liability for your compliance matters.

This entry was posted on Friday, February 26th, 2010 at 10:22 am and is filed under Custody, General Compliance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.