Financial advisors should step up their education on how to comply with SEC custody rules in the wake of audits that revealed widespread violations, says Equity Trust Co. based in Elyria, Ohio.

Financial firms need a designated person to make sure the office is complying with SEC custody regulations, says Jeffrey A. Kelley, chief operating officer of Equity Trust.

Kelley recently issued a report on what advisors should do to comply with the SEC custody regulations, which were changed in 2009. The white paper was in response to an SEC alert issued last spring that said one in three advisors audited were not complying with the custody regulations.

Some advisors simply did not know they were supposed to adhere to custody regulations and others were operating under old practices, Kelley says. Any time an advisor holds a client’s assets or can have money paid to a third party – someone other than the client – the advisor is deemed to have custody of the client’s assets.

At that point, a custodian should be designated to take control of the assets, Equity Trust says. The custodian needs to file quarterly reports with the client, but it is up to the financial advisor to make sure the reports are sent to the client.

Equity Trust is a custodian that provides these services to advisors. A major function the firm fulfills is to educate advisors about the new regulations and compliance requirements.

For instance, client assets need to be maintained under a separate account either under the client’s name or under the financial advisor’s name as an agent or trustee, Kelley says. Clients must be notified about actions that have been taken on their behalf.

Advisors should review all contracts and accounts to make sure they are up to date and to determine which are subject to custody rules.

Kelley advises undertaking a practice audit under the guidance of an independent auditor or attorney to make sure all practices in the firm will meet SEC guidelines.