RIA Compliance and Practice Management Blog

Top RIA Compliance Deficiencies: Custody

Posted by RIA in a Box

Nov 8, 2014 9:30:00 AM

Coordinated state exams of 1,130 investment advisory firms conducted by members of the North American Securities Administrators Association (NASAA) found 6,482 compliance deficiencies across 20 registered investment adviser (RIA) compliance categories in 2013. Last week we discussed the deficiencies in supervision, specifically regarding the failure to periodically assess and update policies and procedures, failure to follow procedures, and lack of procedures to prevent misuse of material nonpublic information.

This week’s segment covers another common RIA compliance deficiency category: Custody. The 2013 NASAA investment adviser examination report contains results from 1,130 investment advisory firms examined. In the custody category, of all RIA firms examined, 16.6% of audits noted at least one custody-related deficiency. This figure has increased since the 2011 NASAA RIA compliance report which noted deficiencies in 12.6% of investment advisory firms examined.Download our free white paper: RIA Systems and Operational Best Practices

19.1% of RIA firms with greater than $30 million in assets under management (AUM) had custody-related deficiencies, compared to 13.3% of investment advisory firms with less than $30 million in AUM. About 18% of RIA firms examined for the first time had custody deficiencies compared to around 12% of firms that had previously been examined.

As stated earlier, 16.6% of investment advisory firms examined according to the 2013 NASAA report had custody-related deficiencies. The top custody deficiencies in 2013 were:

  1. Direct fee deduction: Proper client invoice (33.3%)
  2. Direct fee deduction: Dual invoicing client and custodian (10.5%)
  3. Direct fee deduction: Written client authorization (8.1%)
  4. Other ability to obtain customer funds or securities (5.7%)
  5. Direct fee deduction: Notice to administrator on ADV (5.2%)

In 2011, the top custody-related deficiencies were:

  1. Direct fee deduction (~34%)
  2. Inadvertent custody (~23%)
  3. Non-disclosed custody (~11%)
  4. General partner (~9%)
  5. Other- custody (~7%)

Given the increase in custody-related deficiencies from 2011 to 2013, it is evident that RIA firms need to take a step back and ensure they are meeting the requirements to stay in compliance with the relevant state and SEC statutes. NASAA recommends firms implement appropriate custody safeguards, as applicable, and pay close attention to direct fee deduction invoices. As RIA compliance consultants, we encourage the Chief Compliance Officer (CCO) of every investment advisory firm to take a few minutes to look over the firm’s current custody procedures and ensure that all parties, including clients, are being invoiced if required.

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Topics: RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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