InvestmentNews Editorials

Now, not later: RIA custody confusion must be acknowledged by the SEC

Recent guidance still leaves many advisers scratching their heads

Feb 23, 2019 @ 6:00 am

Nothing gets the attention of registered investment advisers quite like the concept of custody status.

For good reason, the Securities and Exchange Commission ramped up its focus on RIAs that have custody of client assets in response to the $65 billion Bernie Madoff Ponzi scheme, in which Mr. Madoff had control of his clients' assets.

To the regulator's credit, the commission rolled up its sleeves and passed an updated custody rule in 2009, which took effect a year later.

One of the key components of the new rule was that any RIA determined to have custody of client assets, based on a murky and evolving set of criteria, is required to pay for an annual "surprise exam" to ensure the business is following the asset custody rules.

Problem solved, right?

No. Not even close.

While the new custody rule, including the weight of a costly annual exam, might have increased the attention paid to custody status by RIAs, it also has added ample amounts of confusion and attempts at clarity.

(More: Custody status continues to perplex RIAs)

According to the Investment Adviser Association, which has been working with several industry custodian firms to encourage the SEC to simplify its custody guidelines, about a third of RIAs acknowledge custody status for at least some of their clients.

However, based on general confusion over what qualifies as custody, both regulators and regulatory watchers believe the actual number of RIAs with custody is much higher.

So many FAQs

As the SEC's growing list of frequently asked questions proves, custody status is far from intuitive.

Recent questions added to the SEC's FAQ, which now total 68, attempt to clarify the commission's February 2017 guidance on inadvertent custody, which affects advisers who acquire clients who bring with them custodial agreements.

While virtually every potential custody trigger is accompanied by exceptions and caveats, an RIA can fall into custody status for things like check-writing abilities on a client's account, possession of certain account passwords, the ability to forward funds and securities, and even for receiving client assets by mistake.

(More: 9 ways advisers may have custody without knowing it)

For larger and more complex RIAs, custody is an accepted reality of doing business. But for thousands of other RIAs dotting the landscape and trying to do the right thing, this is a headache that just won't go away.

You can't even throw in the towel and claim custody status just to cover yourself, because you then run the risk of posting an inaccurate Form ADV, which is frowned upon by regulators.

This is a real issue and a real mess that needs to be addressed by the SEC, but the last we heard, it was parked on the agency's long-term agenda.

It's time the SEC acknowledged the urgency of the matter and resolved to improve it — in the short term.


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