SEC tightens custody controls for investment advisers, improves corporate governance

The SEC adopted new rules this week that will substantially increase protections for investors who turn their money and securities over to an investment adviser registered with the SEC.

The new rules provide safeguards where there is a heightened potential for fraud or theft of client assets, including one rule that requires using independent public accountants as third-party monitors. Depending on the investment adviser’s custody arrangement, the rules would require the investment adviser to be subject to a surprise exam and a custody controls review that are generally not required under existing rules.

Specifically, the new rules require:

• Surprise exam. The adviser is now required to engage an independent public accountant to conduct an annual “surprise exam” to verify that client assets exist. Such a surprise examination would provide another set of eyes on the client’s assets, and additional protection against theft or misuse. The accountants would be required to contact the SEC if they discovered client assets were missing.
  
  
• Custody controls review. When the adviser or an affiliate serves as custodian of client assets, the adviser is now required to obtain a written report — prepared by an accountant that is registered with and subject to regular inspection by the PCAOB — that, among other things, describes the controls in place at the custodian, tests the operating effectiveness of those controls and provides the results of those tests.

The SEC also approved rules requiring companies to disclose more information about employee compensation and corporate governance.

In particular, the new rules require disclosures about:

• The relationship of a company's compensation policies and practices to risk management
• The background and qualifications of directors and nominees
• Legal actions involving a company's executive officers, directors and nominees
• The consideration of diversity in the nomination process for director candidates
• Board leadership structure and the board's role in risk oversight
• Stock and option awards to company executives and directors
• Potential conflicts of interests of compensation consultants

Related news

• SEC scraps surprise audits for non-custodial advisers
• SEC tightens rules on investment advisers, corporate transparency

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