SEC Proposes New Audit Requirements for Investment Advisors
The Securities Exchange Commission has proposed new rules to increase the oversight of investment advisors who retain custody of client assets. The proposed measures come in the wake of what many have termed as a lack of SEC regulation and enforcement that enabled ponzi schemes and other investment fraud to thrive in recent years.
The SEC’s newly proposed regulations include yearly “surprise” audits performed by independent public accountants in order to verify the sanctity of client assets under an investment advisor’s custody. Advisers would be required to disclose the identity of the independent public accountant that performs its surprise audit in public SEC filings, and amend these filings to reflect changes in accountants. In addition, when an adviser or an affiliate directly holds client assets, a custody control review would have to be conducted by a PCAOB-registered and inspected accountant.
The proposed amendments would further require all other custodians holding client assets to directly deliver custodial statements directly to the clients, rather than through investment advisers. These additional safeguards are meant to deter advisers from preparing false account statements, and increase the likelihood that clients discover any discrepancies between the custodial statements and statements from their investment advisors.
The public comment period on these proposed rule amendments will be open for 60 days after their publication in the Federal Register. The full text of the proposed rule amendments have yet to be published.
