January 31, 2019

The AdvisorAssist CCO Series: Custody

The AdvisorAssist CCO Series: Understanding Custody

Regulators, both the SEC and the various States, continue to place focus on how firms identify, monitor and test custody scenarios with client assets. The custody rule was introduced in the Advisers Act of 1940 and was most recently refined in 2009 and in the 2017 SEC no-action letter This letter provided additional guidance with respect to standing letters of authorization (SLOA) and how it affects constructive custody versus real custody.

Real or Constructive

According to the Advisers Act of 1940, a registered investment advisor is deemed to have custody of client assets or funds if it:

  1. directly or indirectly holds client assets or funds;
  2. has authority to obtain possession of client assets or funds; or
  3. has the ability to appropriate client assets or funds.
The SEC further breaks custody down into two (2) categories: constructive and real. Maintaining real custody requires an annual surprise audit in all circumstances. A firm having constructive custody may avoid this audit requirement by satisfying the seven (7) conditions outlined by the SEC. Some common examples of constructive and real custody include:

Constructive Custody - (annual surprise custody audit not required)

  • Deducting advisory fees from client accounts
  • Maintaining standing letters of authorization (“SLOA”) to third parties

Real Custody - (annual surprise custody audit required)

  • Collecting more than $1,200/$500 in advisory fees, six months or more in advance
  • Maintaining client login credentials
  • Serving as a trustee for client accounts
  • Having power of attorney over client accounts
  • Holding onto client checks for longer than 72 hours (3 business days)
  • Receiving stock certificates from the client and forwarding them to the custodian
  • Receiving of third-party checks made payable to the client and forwarding them to the custodian
  • Managing a private fund

Advisors that have real custody of client assets must obtain a surprise "custody audit" at least annually from an independent auditor compliant with the AICPA attestation standards.

Through the Regulator's Eyes

Regulators want to ensure that all parties (registered investment advisors, clients, and regulators) understand when and to what extent advisors have "possession" of client securities or funds. This includes fee deductions, client account access, money movements or the timing of deposits or withdrawals.

As a firm, it is critical to:

  1. Identify when you have custody.
  2. Train your supervised persons regarding custody rules and firm policies.
  3. If custody is identified, promptly make the appropriate disclosures to your regulatory documents, compliance program and inform state regulators, if required.

CCO Best Practices

  • Be sure that you understand the concept of custody, both real and constructive so that you remain aware of any practices that may be construed as each.
  • Be diligent prior to adding new vendors, products, practices or procedures within the firm that may potentially trigger a custody situation.
  • Perform "due inquiry" on your custodian to ensure that each of your clients are receiving statements at least quarterly. This can be accomplished by either requesting copies of client statements or asking your custodian for written confirmation that statements were sent to each client.
  • If your firm receives checks directly from clients, maintain a "check log" and ensure the firm is remitting these checks within 72 hours of receipt. If you are ever in receipt of a client’s stock certificate, return to the client immediately.
  • State-registered RIA firms must invoice clients directly each time you initiate advisory fee deductions. This invoice must include a simple explanation of how client fees were calculated.
  • If your firm does have real custody, contract with an independent accounting firm to perform an annual surprise custody audit.

November 8, 2018

Insufficient Resources for Compliance Program

On November 6, 2018, the Securities Exchange Commission ("SEC") announced a settlement with a former Chief Executive Officer ("CEO") of a now-defunct Registered Investment Advisor. The settlement included the CEO’s censure from the industry and a monetary fine of $45,000.

The bulk of the SEC’s findings centered around the fact that the CEO did not take appropriate action to rectify inadequate resources to effectively implement their compliance program.

On multiple occasions, the named Chief Compliance Officer ("CCO") brought deficiencies and recommendations to increase the firm’s internal or external resources to effectly address compliance functions in the firm’s compliance program to the CEO and management’s attention. These recommendations were largely ignored, which led to many of the Adviser’s Act violations found by the SEC.

Key reminders & tasks related to Compliance Resourcing and Authority:

  • Management must set the tone for compliance.
  • Management must provide adequate resources to properly affect the firms’ compliance program.
  • The CCO must be in a position of authority to effect change and policy within the firm.
  • For those multi-hatted CCO’s, exploration in adds to staff or the delegation to internal (or external) resources to assist with the compliance program is advisable.

To read the entire enforcement case, see the SEC Administrative Proceedings.

October 17, 2018


Beginning on October 1, 2018, the Financial Industry Regulatory Authority (“FINRA”) restructured certain representative-level qualification exams by creating the Securities Industry Essentials (SIE or Essentials) exam and revising appropriate representative-level qualification exams. This change is meant to reduce the duplication across various exams regarding general industry knowledge and was created to allow persons not associated with a firm to show that they have general industry knowledge as they seek jobs in the industry.

Persons seeking their Series 65 license to act as investment advisors (IARs) do not need to take the SIE Exam.

Key facts about the SIE exam include:

  • The SIE Exam is open to anyone 18 years old or older and the individual does not have to be associated with a firm;
  • The exam is good for four years and, beginning October 1, 2018, is to be used in conjunction with other representative exams;
  • If you already hold representative-level exams (i.e., Series 6, 7, 22, 57, etc.) you will be granted credit for the SIE Exam;
  • The SIE Exam can be passed once and used in conjunction with taking other affected exams; and
  • The table below outlines the affected exam categories:
Registration Category Requirements as of October 1, 2018
Investment Company Representative SIE & Series 6
General Securities Representative SIE & Series 7
DPP Representative SIE & Series 22
Securities Trader SIE & Series 57
Investment Banking Representative SIE & Series 79
Private Securities Offerings Representative SIE & Series 82
Research Analyst SIE & Series 7 + 86 + 87
Operations Professional SIE & Series 99

To review FINRA's published Q&A on the SIE exam, please see: Click Here

October 12, 2018

Mock Exams: Dress Rehearsals for the Real Thing

In the September/October 2018 edition of the Investment & Wealth Monitor Magazine, AdvisorAssist’s Ann Keitner and Conor Anderson wrote an article targeting CCOs on mock exams; discussing their importance and steps on how to run one.

A mock exam is a valuable tool for a firm to assess their readiness for an actual regulatory exam. All advisors benefit from this exercise, including new advisors that have never been examined and mature advisors who have been through multiple regulatory exams.

The article covers the below areas:

  • Determining the goal of the exam
  • Deciding the type of exam to conduct
  • Planning for the exam
  • Deciding who will conduct the exam
  • What to do with the exam results

To read the full article, please see: Click Here


Ann Keitner
Conor Anderson

May 4, 2018

SEC Action Lookup Website

The U.S. Securities and Exchange Commission ("SEC") has launched a new website [https://www.sec.gov/litigations/sec-action-look-up] to assist investors as well as recruiting advisors with a search tool to search for those individuals for which the SEC has taken action.

The website search includes individuals against whom a judgment or order has been issued by the SEC, including individuals who settled, defaulted, or contested their actions, provided a judgment or order was issued against them.

The results will not include individuals whose cases are currently pending at the trial court or those against whom no judgment or order has been issued. Results will also not include individuals named in district court actions as “relief defendants.” See https://www.sec.gov/sec-action-lookup-information for a full description.

Advisor Takeaways:

The SEC continues to try and close information gaps for investors. Compliance personnel should reference this site before hiring any supervised person. In addition, while reviewing these regulatory actions may provide some entertainment value, there are lessons to be learned. Not every action is rooted in intent. Mistakes happen and mistakes can be costly. Compliance Officers should add this resource to their toolkit.

AdvisorAssist is here to assist with any compliance or regulatory questions you may have.

March 21, 2018

5th Circuit Court Vacates DOL Rule

On March 15, 2018, the Fifth Circuit Court of Appeals ruled via split decision to “vacate” the well-publicized DOL fiduciary rule. This decision does not come as much surprise. It has long been rumored that the DOL rule was destined for failure after President Trump ordered a formal review in March 2017. Speculation by industry watchers is that the next step for the DOL rule could be the U.S. Supreme Court.

While this decision is limited in scope, it creates an opportunity for the Securities and Exchange Commission (“SEC”) to take the lead on a uniform fiduciary standard for both RIAs and broker-dealers. The SEC is the more natural choice for marrying the fiduciary standard across both RIAs and broker-dealers.

We expect the SEC to prioritize a new fiduciary rule proposal. Although the timing is uncertain, we expect to learn more prior to 2019.

What does this mean for you?

With or without the DOL, you still have a fiduciary responsibility to act in the best interest of your clients. You may not have to go to the extent of best interest contracts. However, “Know Your Clients” requirements are never going away and the regulators will always want documentation of how you operate as a fiduciary. It may still make sense to adopt some of the documentation standards of the DOL’s “Level Fee Fiduciary” when making rollover recommendations.


Brian Young
Brendan Furey