Amendments to the SEC Custody Rule

New amendments to the SEC Custody Rule will take effect this month. These changes will impose a number of additional controls on registered advisors in order to decrease fraudulent activity.

The SEC’s adoption of amendments to Rule 206(4)-2 under the Investment Advisers Act of 1940 (the “Amended Custody Rule”) and related changes to Form ADV are effective March 12, 2010.

The primary purpose of the amendments to the custody rule is to impose additional controls on registered investment advisers (RIAs) who have access to client funds and securities. RIAs have “custody” of client assets when they have: possession of client funds or securities, are authorized to withdraw client funds or securities maintained with a third-party custodian, or possess legal capacities that gives them legal ownership of, or access to, their client’s funds or securities.

These amendments are part of the SEC’s attempt to deter fraudulent activity, to restore the public’s faith in the investment advisory industry, and to restore their faith and confidence in the SEC.

The amended custody rule will now require an advisor with custody to complete the following actions:
submit to an unplanned, annual audit of all discretionary accounts administered by an independent public accountant registered with the Public Accounting Oversight Board (PCAOB) in order to verify client assets
the advisor or related person must obtain an annual written internal controls report from an accounting firm registered with PCAOB, unless these accounts are held at a third-party custodian
the advisor must send a notice to the client, if the advisor is opening an account on behalf of him/her with a qualified custodian. This notice must include contact information for the custodian as well as a statement encouraging the client to compare the account statements of the custodian and advisor.

the advisor must have a reasonable basis for believing that the custodian sends statements to clients on a quarterly basis.

While the adoption of these amendments may work to decrease fraudulent activity, adopting these measures will also impose significant costs on investment advisors without offering a proportionate benefit to their clients. In spite of the potential costs of these new amendments, all SEC-registered investment advisors are required to comply with theses updated custody rules by the effective date, unless other compliance dates have been specified.

Bernard Krooks is a New York Elder Law and New York Estate Planning lawyer with offices in White Plains, Fishkill, and New York, New York. To learn more, visit

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