Rule 206(4)-2)

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Oct 2, 2009 2:32 pm

Anyone have any insight on this rule that will affect RIA's. It basically says that an annual surprise audit by an accounting firm will be required for RIAs that have custody. Custody as being defined as including assets that are held at a custodian but where the advisor has the ability to debit the account for quarterly fees. (ie most of us)

I was reading an article today that says the sec will want the advisor to pay for the audits. This sounds expensive.

I haven't spent much time looking at this, hopefully someone else has and can give us some input.

Oct 2, 2009 2:38 pm

The way I read it is that you can pick the accountant to do the "surprise" audit. Mine's gonna include it in the fees I already pay.



Fred, Bill, Zach - care to weigh in on this?

Oct 2, 2009 2:42 pm

true- but I think it has to be a preapproved accounting firm. So my local CPA couldn't do it. Right now I think only the big accounting firms are approved.




Oct 2, 2009 2:46 pm

I believe that its a two part requirement being:

 
Either
 
a) You have custody of client assets (including the ability to deduct fees) which is held with a qualified custodian and the clients receive (at least) quarterly statements from the custodian...
 
or)
 
b) You have custody of client assets (including the ability to deduct fees) which is held with a qualfied custodian and the clients DO NOT receive (at least) quarterly statements from the custodian.  Then you will need to employ an accounting firm for a surprise audit.
 
So if your clients receive statements from the custodian (and you verify that), then you don't need the surprise audit.
Oct 2, 2009 2:48 pm
CALI123:

true- but I think it has to be a preapproved accounting firm. So my local CPA couldn't do it. Right now I think only the big accounting firms are approved.





Is there an approved list? I think it would be kind of hard to enforce that, anti-trust and all. Seems a little elitist.



Looking at the Rule, it didn't mention which accounting firm. It actually just says accountant.



Here's an idea, let's make it more expensive to do the right thing for your clients!

Oct 2, 2009 2:51 pm
Moraen:


Here's an idea, let's make it more expensive to do the right thing for your clients!

 
You don't want to read the legislation coming down the pike then...RIA's to pay OCIE fees. 
Oct 2, 2009 2:51 pm

Hmm... looks like WB is correct. Here is the relevant language:



Safekeeping required. If you are an investment adviser registered or required to be registered under section 203 of the Act, it is a fraudulent, deceptive, or manipulative act, practice or course of business within the meaning of section 206(4) of the Act for you to have custody of client funds or securities unless --



Qualified custodian. A qualified custodian maintains those funds and securities -- (i) In a separate account for each client under that client's name; or (ii) In accounts that contain only your clients' funds and securities, under your name as agent or trustee for the clients.



Notice to clients. If you open an account with a qualified custodian on your client's behalf, either under the client's name or under your name as agent, you notify the client in writing of the qualified custodian's name, address, and the manner in which the funds or securities are maintained, promptly when the account is opened and following any changes to this information.



Account statements to clients. (i) By qualified custodian. You have a reasonable basis for believing that the qualified custodian sends an account statement, at least quarterly, to each of your clients for which it maintains funds or securities, identifying the amount of funds and of each security in the account at the end of the period and setting forth all transactions in the account during that period; or



The rest is if it is the advisor who sends out the quarterly statements.



Oct 2, 2009 2:53 pm
Wet_Blanket:
Moraen:

Here's an idea, let's make it more expensive to do the right thing for your clients!



You don't want to read the legislation coming down the pike then...RIA's to pay OCIE fees.





What?!

Oct 2, 2009 2:54 pm

Yes it need to be a firm approved by the PCAOB. The catch is (as I understand it). The PCAOB only has authority to audit publicly trade companies. So this could end up in court.

I read a response from TDA that said most, if not all of the RIA that use them would fall into this category. I had ignored this rule change since I thought it wouldn't apply to me, but it seems that it does.

Oct 2, 2009 2:54 pm

So you guys make your own statements?

Oct 2, 2009 2:57 pm
Moraen:
Wet_Blanket:
Moraen:

Here's an idea, let's make it more expensive to do the right thing for your clients!

 

You don't want to read the legislation coming down the pike then...RIA's to pay OCIE fees. 



What?!

 
It's in the latest issue of IA Watch (fine publication).
Oct 2, 2009 3:22 pm

This is the article/whitepaper I saw which made me nervous:

http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/us_fsi_Im_Custody%20Article_June09(2).pdf

Oct 2, 2009 3:24 pm
CALI123:

This is the article/whitepaper I saw which made me nervous:

http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/us_fsi_Im_Custody%20Article_June09(2).pdf

 
If that's accurate - then my information is old.
Oct 2, 2009 3:25 pm

RIA's to pay OCIE fees

What's next? I gotta pay a portion of the cop's salary next time I get a speeding ticket. I thought this is what taxes are for.

Oct 2, 2009 3:32 pm

hopefully, if these rules take place, they will raise the ses asset requirement to 100 million. I always enjoyed my states people better...

Oct 3, 2009 4:41 pm

You know, every person I've asked about this inside the industry is absolutely convinced it'll never pass.   I'm not saying it won't, I'm just saying that's what I hear.   There's too much backlash from the lobbying orgs on the RIA side saying it's not going to solve any problems (which you could debate) and just costs way too much to small businesses. 

 
As one of the few (if any) CPAs that owns one of the consulting firms for RIAs, I've already looked at getting on the list of acceptable accounting firms.   If they do somehow pass this, I'll make sure there's at least one reasonably priced CPA firm that can do the SEC RIA asset audit.   There's no reason for it to cost $5,000.
 
Oct 5, 2009 8:27 am

Zach-

Thanks for chiming in. It makes me feel better to hear that it most likely won't pass.