SEC cracks down on advisers' access to clients' outside accounts

As part of its focus on custody violations, the agency is examining situations in which clients give advisers their usernames and passwords for accounts the adviser doesn't manage

Oct 22, 2015 @ 12:50 pm

By Mark Schoeff Jr.

Advisers who can access their clients' employer-sponsored retirement accounts may find themselves in the crosshairs of the Securities and Exchange Commission.

As part of its ongoing emphasis on custody violations, the agency is looking carefully at situations in which clients give advisers their usernames and passwords for financial accounts that aren't managed by the adviser, according to Kevin Woodard, managing director of Graydon Compliance Solutions.

Advisers must convince the SEC they are not able to take distributions from the accounts if they're not claiming custody of them.

“If you can't prove you can't steal from it, you should say you have custody,” Mr. Woodard said Wednesday at the National Association of Personal Financial Advisors fall conference in Indianapolis.


The SEC is focusing on custody in the wake of the multibillion-dollar rip-off by Bernie Madoff, who furtively maintained control of client assets. In 2013, the SEC put out a special alert about custody.

The SEC also has made custody an ongoing examination priority.

One adviser at the NAPFA conference has felt the brunt of that initiative in a recent exam.

“They were brutal about the username and password issue,” said the adviser, who insisted on anonymity because the exam is still underway.

The adviser said that over the course of a one-week exam, the SEC spent five hours pulling up each website for which the firm had client login information.


“They put the fear of God in you,” the adviser said.

The challenge for advisers is that as they build client trust, clients turn to them for help on other accounts that aren't housed with the adviser. They are willing to give advisers the ability to get into those accounts and review them.

“This is a service customers want,” Matthew Murphy, founder of Murphy Capital Advisors, said in an interview at the conference. “If you're helping them with all of their investments, why can't you look at their 401(k)?”

One solution would be for 401(k) providers to give special access to a plan participant's financial adviser, Mr. Murphy said.

“Maybe the 401(k) business should set up an adviser login so that we can view the account and rebalance,” Mr. Murphy said.

In its effort to prevent the next Madoff situation, the SEC will continue to be aggressive about failures surrounding the custody rule, which can be complicated, Mr. Woodard said.

A custody stumble “has a high degree of chance of going to enforcement,” Mr. Woodard said.


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