It’s not an enforcement matter, yet, but OCIE has fired a warning shot regarding advisers’ custody of client assets. And there’s little question that enforcement actions will result: OCIE says it referred some of their deficiency findings to the Division of Enforcement.
The most concerning thing about OCIE’s risk alert is its finding that some advisers don’t recognize when they have “custody” of client assets. OCIE seems to think that some advisers don’t know what “surprise” means either: OCIE observed that some funds scheduled required surprise custody examinations at the same time each year. They also raised concerns about the independence of auditors and whether audits were consistent with GAAP.
There seems to be a relatively easy way for advisers to ensure that they comply with the custody rule: read and understand it!