Leading figures in the financial advisor industry are asking the Securities and Exchange Commission for more clarity in the wake of new SEC complaints Monday about custody of client funds.

In a risk alert announcement to practitioners and an investor bulletin to the general public, the agency warned custody violations were showing up in one out of every three firm exams. Sanctions have ranged from mandated paperwork revisions to civil lawsuits.

Investment Advisor Association General Counsel Karen Barr faulted the regulator for failing to provide information on the volume and severity of the problems.

“The definition of custody brings in some scenarios which aren’t necessarily a source of great risk to customers,” said Barr.

She added the SEC needs to take a risk-based look at what should be considered “constructive custody.”

The SEC could also aid compliance within the profession by clarifying custody rules on advisors’ ability to withdraw funds, urged Peggy Ruhlin, chief executive officer of Budrus, Ruhlin & Roe, a Columbus, Ohio-based advisory firm.

“If advisors can’t withdraw funds that can benefit themselves, is that enough of a restriction? We would all like to know the answer to that,” Ruhlin said.

On Monday, the SEC reiterated that it is concerned about clients giving personal identification information and passwords for their online accounts to financial advisors.

But Ruhlin noted most big 401(k) custodians have safeguards: special sign-ons for an advisor to log in as an advisor to a client’s account that restrict him or her to rebalancing investments or changing how contributions will be invested, with no power to withdraw money.

Smaller 401(k) providers, she said, usually do not allow funds to be withdrawn online.

Reflecting on a 529 college savings plan she has established for her grandchild, Ruhlin said if she had an advisor who was logging in as her with her permission, the person could make changes in the investments (which would be her intent), but the only way to withdraw funds would be to make a payment to a school, to the account owner or the beneficiary.

“I don’t see how the advisor could withdraw funds for himself,” Ruhlin said.

Greenspring Wealth Management Private Client Group Managing Director Patrick Collins said customers benefit from giving advisors access to online accounts.

“From a client’s perspective, it doesn’t make a whole lot of sense to have an advisor managing a pool of their assets in one area and then having no input in another pool of their assets, such as the 401(k). By not knowing the entire picture, advisor could be duplicating effort from investment standpoint,” he said.

In the risk alert announcement, the SEC cited the following custody problems that arise when an advisor:

•  Fails to recognize that she or he has custody when serving as trustee, when authorized to write or sign checks for clients, or when authorized to make withdrawals from a client’s account as part of bill-paying services.
•  Fails to meet the custody rule’s surprise examination requirements.
•  Fails to satisfy the custody rule’s qualified custodian requirements by commingling client, proprietary and employee assets in a single account, or by lacking a reasonable basis to believe that a qualified custodian is sending quarterly account statements to the client.

The agency also faulted some advisors of audited pooled investments for failing to hire an independent accountant, to have the audits done in accordance with U.S. GAAP standards, and to prove financial statements were sent to all fund investors.

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