Registered Investment Advisers (RIAs) are responsible for ensuring they consider their clients’ best interests. Because handling a client’s finances is confidential and personal, RIAs are also subject to strict surprise audits. This means that if you’re an RIA, you need to be aware of the SEC custody rule audit requirement.

Let’s discuss the custody rule audit requirements to prepare you for your surprise compliance check with SEC regulations. 

 

What is an SEC Custody Rule Audit?

Under the Investment Advisers Act of 1940, SEC Rule 206(4)-2 requires an annual surprise audit of registered investment advisers who hold custody of clients’ funds to securities. These audits are conducted by independent public accountancy firms registered with the Public Company Accounting Oversight Board (PCAOB).

Several requirements are associated with the SEC custody rule audit. Let’s examine three of the most critical custody rule audit requirements to ensure you know what to expect from your audit.

 

Top 3 Facts about the SEC Custody Rule Audit Requirement

1. Surprise examinations

Unlike regularly scheduled annual audits, the SEC custody rule audit is unscheduled and can happen anytime during the fiscal year. An unscheduled audit ensures an RIA complies with the SEC’s rules and regulations, protects a client’s funds or assets, and detects fraud or foul play. 

RIAs must contact an independent public accountancy firm registered with the PCAOB to schedule an audit. Once an RIA notifies their preferred accounting firm, they enter into a written agreement with their firm. From there, the public accounting firm schedules an audit within 120 days of a selected date. 

When the audit is completed, the accountant must file Form ADV-E with the SEC within 120 days of the RIA surprise audit. The accounting firm is also responsible for reporting any discrepancies to the SEC, which must be reported within one business day of the surprise examination.

 

2. Use of Qualified Custodians

Another SEC custody rule audit requirement states RIAs must use qualified custodians to manage clients’ funds and assets. This means RIAs must partner with banks, registered broker-dealers, or other registered financial institutions to further protect clients’ assets from being lost, misused, or stolen.

The surprise audit will investigate to ensure that qualified custodians are precisely that—qualified.

 

3. Direct Delivery of Account Statements

Account statements are a critical piece of a custody rule audit requirement. Qualified custodians are required to send their clients quarterly account statements that accurately describe their funds and transactions. 

RIAs must ensure their clients receive their account statements on a timely basis. Not only does the delivery of account statements keep clients informed of their financial holdings and investments, but it also helps create and foster transparency and trust between an RIA and their client. 

 

Be Compliant with SEC Regulations

Although surprise examinations can be complex, they’re less intimidating when you take the time to understand the surprise audit requirements. You’ll also want to partner with a public accounting firm that has experience with surprise examinations so that you can stay on top of your legal obligations.

At Assurance Dimensions, we’re a PCOAB-registered firm, and our team of auditors understands how to navigate SEC custody audits. Contact us today to learn how we can help with your next surprise audit.