U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Custody of Funds or Securities of Clients by Investment Advisers (Final Rule)


Commissioner Elisse B. Walter

U.S. Securities and Exchange Commission

Washington, D.C.
December 16, 2009

I, too, would like to thank the staff, especially the Division of Investment Management, including Buddy Donohue, Bob Plaze, Sarah Bessin, Dan Kahl, Vivien Liu, Melissa Roverts, Rick Sennett, Bryan Morris, and Jamie Eichen for their hard work on the recommendations before us today. I would also like to thank the other offices and divisions that made significant contributions to the recommendations, including the Office of the General Counsel, Office of the Chief Accountant, and Division of Risk, Strategy, and Financial Innovation.

The safekeeping of assets is central to investor protection. We have brought a number of cases in the recent past alleging misuse of investor assets and it is clear that further action is necessary. The enhancements to the custody rule that we are voting on this morning are designed to strengthen our regulatory system and decrease the possibilities for misuse. The rule is prophylactic in nature, and is thus designed to deter custody-related violations from occurring in the first place, and detect them as early as possible when they do.

It is hard to put a price tag on the value of the deterrence that this type of rule can provide at a time when trust and confidence in our markets are at a premium. There is no doubt that there are costs involved with deterrence, but consider the costs—both in terms of dollars and in confidence—of the alternative. As has been said, "an ounce of prevention is worth a pound of cure." I think that we should be careful to keep this in mind as we design rules; we must learn from the past and move towards a modern regulatory framework.

It is also important to understand that our actions today addressing custody will not be our last, with additional work on custody, including review of the rules governing custody of customer assets by broker-dealers, to come. This will help ensure that the Commission is taking a comprehensive approach to this issue, and I look forward to the staff's recommendations in the near future.

I support the recommendations that the staff makes today, but there are some particular aspects I would like to comment on.

First, although I fully understand the staff's recommendation that we permit advisers to pooled investment vehicles to satisfy the surprise examination requirement by having an annual audit of the pool and distributing the audited financials to the investors, I have concerns about whether the audit alone provides sufficient opportunity for the independent verification of assets. Thus, I have asked the staff to consider ways to address this issue and I look forward to hearing their thoughts.

Second, as with all of its actions, the Commission has been particularly careful with this rule to balance the burdens associated with enhanced custody regulation with the protections it provides. Thus, the rule is designed to provide additional protections where the risks may be greater, for example, by requiring both surprise examinations and internal control reports for advisers that self custody, while only requiring a surprise examination for those advisers that use independent custodians. With respect to related person custodians, I am pleased that the rule provides a presumption that operations are not independent, and provides a non-exclusive list of factors that must be satisfied if an adviser chooses to take on the burden of rebutting that presumption. This structure will protect investors and provide specificity that will assist examiners.

And, for smaller advisers that use independent custodians, but nonetheless have the authority to obtain possession of client funds or securities, we have asked the staff to conduct a study following the first round of surprise examinations to provide us with additional information. I am certain that that analysis will be helpful but we must remember that there are real risks to investors in that situation, and those investors tend to be smaller and more vulnerable. Sitting here today, admittedly without the benefit of the staff's review, I would be loathe to remove those smaller advisers from the surprise examination requirement. I look forward to the results of that review.

With respect to fee deduction rights, we have emphasized advisory firm procedures to ward off problems. I, for one, would welcome a broader review of this regulatory approach, including analysis of whether, and if so where, we may need greater specificity in our rules.

Once again, I would like to thank the staff for their hard work on the recommendations.


Modified: 12/17/2009