Perhaps no Advisers Act rule challenges firms more than the custody rule.
It’s technically known as rule 206(4)-2
. The intent is to protect client assets.
It was revised after the financial crisis in a way that has rankled some. While the ability to debit fees is technically custody, that practice alone fails to hold the firm to some of the rule’s stricter dictates, such as having to undergo a surprise exam or to pay for an independent audit.
Thank Bernie Madoff
for the attention to this rule. That’s why firms now must have a reasonable belief that custodians are sending clients quarterly statements.
But these are the simpler aspect of the rule. The complexity grows because many firms struggle to determine if a given situation – and the industry can generate a countless number of such examples – constitutes custody or not.
Because examiners continue to focus on custody, so must you. As you can see, this is one rule that causes the SEC to name CCOs in enforcement actions.