SEC Surprise Exams of Investment Advisers
The SEC is considering rule amendments that would make it harder for an investment adviser to steal client assets and provide fake account statements. The rules are designed to give more protection to investors who give custody of their money to investment advisers, a practice that will always involve some level of trust and some potential for fraud.
One proposal is to subject investment advisers to a yearly “surprise exam” to make sure the investment adviser hasn’t misappropriated a client’s assets. Investment advisers don’t necessarily have physical custody of client assets, but they often have authority to withdraw client funds, or they may be affiliated with the bank or broker who does have physical custody.
If the rules are eventually adopted, an independent public accountant will be the third-party monitor. More controls and surprise exams mean more cost. The SEC/Congress should consider what is less expensive: surprise exams or a requirement that client assets be held by independent custodians.
