No surprise exams for most SEC advisers

GAO report shows scant oversight of commission's charges
AUG 08, 2013
Most of the investment advisers registered with the Securities and Exchange Commission who maintain custody of their clients' investment funds aren't subject to surprise annual examinations, according to a new federal report. A study released last Monday by the Government Accountability Office found that, as of April 1, 4,446 of the 9,982 SEC-registered advisers had control over client money, amounting to more than $14 trillion in client assets. Of those who had custody, 1,321 were subject to annual surprise examinations by independent public accountants. A total of 2,956 advisers with custody don't have to undergo surprise exams. Financial advisers can be exempted from surprise inspections if they have custody of client assets only to deduct fees from client accounts, are “operationally independent” of the custodian or advise a pooled fund subject to annual audits by an independent public accountant. There are 169 advisers who have possession of client funds but aren't subject to annual surprise audits because they are operationally independent from their custodian, even though the adviser and custodian are owned by the same entity. In these cases, the adviser and the custodian can't have common supervision or share the same premises.

PERFORMANCE AUDIT

The GAO conducted a performance audit of 12 investment advisers from September through June to determine the costs of the inspections. It found that the firms paid anywhere from $3,500 to $31,000 for the surprise examinations. Charge for audits are based on a number of factors, including the number of clients and the amount of assets in custody. The number of custodial clients served by the advisers ranged from one to more than 1 million. Internal control reporting requirements cost between $25,000 and $500,000, according to accounting firms that the GAO interviewed. The GAO custody study was mandated by the Dodd-Frank financial reform law. Most investment advisers house their clients' assets with a third-party custodian such as Charles Schwab & Co. Inc. or TD Ameritrade Inc. In 2009, the SEC amended the custody rule to expand surprise inspections in response to the Ponzi scheme perpetrated by Bernard Madoff, which bilked investors of more than $50 billion. The scheme revolved in part around the fact that his firm had custody of his clients' money. In a March investor alert, the SEC said that about one-third of advisory firms examined last year — about 140 — were flagged for problems with how they held or accessed their clients' assets. The SEC exams found that many advisers didn't know that they had inadvertently become custodians. It can be triggered by actions such as serving as a trustee for a client, signing checks on a client's behalf or taking funds from client accounts to pay bills.

Latest News

Married retirees could be in for an $18,100 Social Security cut by 2032, CRFB says
Married retirees could be in for an $18,100 Social Security cut by 2032, CRFB says

A new analysis finds long-running fiscal woes coupled with impacts from the One Big Beautiful Bill Act stand to erode the major pillar for retirement income planning.

SEC bars New Jersey advisor after $9.9M fraud against Gold Star families
SEC bars New Jersey advisor after $9.9M fraud against Gold Star families

Caz Craffy, whom the Department of Justice hit with a 12-year prison term last year for defrauding grieving military families, has been officially exiled from the securities agency.

Navigating the great wealth transfer: Are advisors ready for both waves?
Navigating the great wealth transfer: Are advisors ready for both waves?

After years or decades spent building deep relationships with clients, experienced advisors' attention and intention must turn toward their spouses, children, and future generations.

UBS Financial loses another investor lawsuit involving Tesla stock
UBS Financial loses another investor lawsuit involving Tesla stock

The customer’s UBS financial advisor allegedly mishandled an options strategy called a collar, according to the client’s attorney.

Trump's one big beautiful bill reshapes charitable giving for donors and advisors
Trump's one big beautiful bill reshapes charitable giving for donors and advisors

An expansion to a 2017 TCJA provision, a permanent increase to the standard deduction, and additional incentives for non-itemizers add new twists to the donate-or-wait decision.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.