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1、NAREIM Presents:SEC Custody Rule Amendments - Practical Implications Any arrangement (including a power of attorney) under which the RIA is authorized or permitted to withdraw client funds or securities maintained with a custodian upon the RIAs instruction to the custodian; and Any capacity (e.g., a
2、 GP of a partnership, managing member of LLC, trustee of a trust or comparable position for another type of pooled investment vehicle) that gives the RIA or a supervised person legal ownership of or access to client funds or securities.,5,Amended Custody Rule,Overview/Definitions Qualified Custodian
3、 (“QC”) Bank, savings association, registered broker/dealer, registered futures commission merchant, and foreign financial institution that customarily holds financial assets for its customers, provided that the foreign financial institution keeps the advisory clients assets in customer accounts seg
4、regated from its proprietary assets. The QC maintains client funds and securities (i) in a separate account for each client under such clients name; or (ii) in accounts that contain only client funds and securities, under the RIAs name as agent or trustee for the clients. Amended Rule does not requi
5、re use of an independent custodian, but the SEC encourages the use of custodians independent of the RIA, whenever feasible.,6,Amended Custody Rule,Overview/Definitions RIA also has custody if a related person holds, directly or indirectly, client funds or securities or has any authority to obtain po
6、ssession of them, in connection with advisory services the RIA provides to clients. Related Person a person directly or indirectly controlling or controlled by the RIA and any person under common control with the RIA. May include BDs and banks. Privately Offered Securities the Amended Rule retains t
7、he current definition of “privately offered securities” as securities that are: acquired from the issuer in a transaction or chain of transactions not involving any public offering, uncertificated, and ownership thereof is recorded only on the books of the issuer or its transfer agent in the name of
8、 the client, and transferable only with prior consent of the issuer or holders of the outstanding securities of the issuer.,7,Annual Surprise Exam,RIAs must undergo an Annual Surprise Examination only for client accounts for which they have custody (including via power of attorney, acting as GP or t
9、rustee, or other similar legal authority). Exemptions From Annual Surprise Exam If RIA is deemed to have custody solely as a result of fee deductions from client accounts, or RIAs related custodian holds client assets and the RIA can demonstrate “operational independence” from the related custodian
10、(note that the internal control report will still be required for the related custodian). “Operational Independence”: Client assets held by related custodian are not subject to claims of the RIAs creditors; RIA personnel do not have custody, possession of, or the power to control the disposition of
11、such client assets; No common supervision of RIA personnel and personnel of the related custodian; and RIA personnel do not hold any position or share premises with the related custodian.,8,Annual Surprise Exam,Exemptions from Annual Surprise Exam (continued) RIA of an Pooled Investment Vehicle (“Fu
12、nd”) is deemed to have complied with the Annual Surprise Exam requirement with respect to a Fund: That is subject to an audit at least annually That distributes its audited financial statements, prepared in accordance with GAAP, to all investors within 120 days of the funds fiscal year-end (or withi
13、n 180 days for funds of funds); Whose audit is conducted by an independent public accountant registered with and subject to regular inspection by the PCAOB, as of the commencement of the professional engagement period and as of each calendar year-end; and That, upon its liquidation, distributes its
14、audited financial statements, prepared in accordance with GAAP, to all of the investors promptly after the completion of the final audit.,9,Annual Surprise Exam,RIA with custody of non-pooled client assets must still undergo an Annual Surprise Exam for those separately managed assets. The Accountant
15、s Procedures (under AICPA Attestation Standards Section 601) should normally include, on a sample basis per client account, confirmation of Clients funds and securities, with both the qualified custodian and the client (inclusive of privately offered securities) and Contributions and withdrawals, wi
16、th clients.,10,Privately Offered Securities,No longer permits the accountant conducting the annual verification of client assets to forego examining privately offered securities; thus, RIAs that maintain custody of privately offered securities will be subject to the surprise exam requirement. Par. (
17、b)(2) generally exempts from the QC requirements privately offered securities held for the account of a Fund, but only if the Fund is audited and the audited financial statements are distributed, as described in par. (b)(4) of the Rule. Accountants verification procedures should include confirmation
18、 with the issuer of or counterparty to the security, or, where replies are not received, alternative procedures.,11,Internal Control Report,New requirement: Where advisory client assets are maintained by the RIA itself or a related person, rather than an independent QC, the RIA must obtain, or recei
19、ve from its related person, no less than once each calendar year, a written, internal control report (such as a Type II SAS 70 Report) prepared by an independent public accountant. QC only needs to obtain an internal control report if it maintains the funds or securities of its own advisory clients
20、or clients of related persons. Accountant must be registered with, and subject to regular inspection, as of beginning of engagement and each calendar year-end, by PCAOB Goal of Examination obtain reasonable assurance that QCs controls (i) have been in operation as of a specific date; (ii) are suitab
21、ly designed and (iii) operating effectively to meet control objectives related to custody of funds and securities during a specific period Internal control report must include an opinion from the independent public accountant with respect to the RIAs or related persons controls relating to custody o
22、f client assets.,12,Internal Control Report (continued),Type II SAS 70 Report: Custodians often provide this to clients who demand a rigorous evaluation of internal control. SEC does not require this specific report, but any other report must also fully address the following items: Controls related
23、to the areas of client account setup (documents for opening and modifying accounts should be received, authenticated and established on the applicable system) Maintenance, authorization and processing of client transactions Security maintenance and setup Processing of income and corporate action tra
24、nsactions Reconciliation of funds and securities to depositories and other unaffiliated custodians Client reporting Nature, timing, extent and results of the procedures to verify that funds and securities are reconciled to depositories and other unaffiliated custodians. RIAs must obtain an internal
25、control report within 6 months of becoming subject to the requirement.,13,Statements to Related Persons; Look-Through Provisions,Funds of Funds: Sending account statements or distributing audited financials will not satisfy the requirements of the Amended Rule “if such account statements or financia
26、l statements are sent solely to limited partners (or members or other beneficial owners) that themselves are limited partnerships (or limited liability companies, or another type of pooled investment vehicle) and are your related persons.” SPVs RIA must either: treat the SPV as a separate client, in
27、 which case, the SPV itself must have annual audited financial statements and deliver the statements to the beneficial owners of the investment funds participating in the SPV; or treat the assets of the SPV as assets of the Funds of which the RIA has indirect custody, in which case, the annual audit
28、ed financial statements of each Fund participating in the SPV must look through the SPV to audit each such participating Funds share of the SPVs assets.,14,Delivery of Account Statements & Notice to Client,Old Rule Required an RIA that had custody, with certain limited exceptions, to maintain client
29、 funds or securities with a QC that the RIA has a “reasonable basis” for believing sends an account statement, at least quarterly, to each client for which the QC maintains funds or securities. Allowed the RIA to send out quarterly account statements, provided it underwent an Annual Surprise Exam by
30、 an independent public accountant Amended Rule Eliminates Surprise Exam alternative (“Annual Audit Provision”) SEC: “We believe that direct delivery of account statements by QCs will provide greater assurance of the integrity of account statements received by clients” “Reasonable basis” must be form
31、ed after “due inquiry” No single method prescribed. SEC suggested that the QC provide the RIA with a copy of the account statement that was delivered (merely viewing statements on QCs web site is insufficient).,15,Delivery of Account Statements & Notice to Client,Old Rule Required an RIA to notify c
32、lients promptly upon opening a custodial account on their behalf and when there were changes to the information required in that notification. Amended Rule Requires the RIA to include a cautionary legend in the notice and subsequent account statements, urging clients to compare the account statement
33、 they receive from the QC with those they receive from the RIA (note that the legend is needed only if the RIA elects to also send its own account statement to clients).,16,Amendments to Form ADV,Amended Form ADV requires RIAs to report more detailed information about their custody practices in the
34、form and to update the information. RIAs are required to report in Form ADV the month in which the last surprise examination occurred. The RIA is required to report whether it has determined that it has overcome the presumption that it is operationally independent from a related QC, and thus is not
35、required to obtain a surprise examination for the clients assets maintained at that QC.,17,Compliance Policies and Procedures,RIAs, especially those that advise Funds, are likely to need to update their custody arrangements and/or compliance policies to satisfy the requirements of the Amended Rule.
36、The SEC Release provides guidance with respect to policies and procedures relating to the safekeeping of client assets that RIAs should consider when updating their compliance manuals. RIAs should consider mandating that any problems be brought to the immediate attention of management and give the C
37、hief Compliance Officer access to sufficient information to enforce these policies and procedures. RIAs with custody of client assets should consider enhancing their policies and procedures by including, for example, requirements for the authorization of more than one employee before the movement of
38、 client assets and creating a firewall between advisory and custodial personnel.,18,Timing to Properly Comply,Effective Date: March 12, 2010 Annual Surprise Examination: First examination to take place by December 31, 2010 Dates for Fund Distribution of Audited Financials: RIA is deemed to comply wi
39、th the Annual Surprise Exam requirement with respect to a Fund that is subject to an audit at least annually and distributes its audited financials to all Fund investors within 120 days of its fiscal year-end (or within 180 days for funds of funds). RIA may rely on this Annual Audit Provision with r
40、espect to a Fund if the RIA becomes contractually obligated to obtain an audit of the financials of the Fund for fiscal years beginning on or after January 2010.,19,Timing to Properly Comply,Agreement with Accountant for Surprise Exam Accountant must . . . notify SEC within 1 business day of finding
41、 any material discrepancy during the course of the exam submit Form ADV-E to the SEC, with accountants certificate, within 120 days of the time chosen by the accountant for surprise examination within 4 business days of resignation or dismissal, file a statement regarding the termination along with
42、Form ADV-E Internal Control Report September 12, 2010 (six months after the Rules effective date) Delivery of Account Statements Starting as of March 12, 2010 (60 days from the Rules effective date) Form ADV RIAs must provide responses to the revised Form ADV in their first annual amendment after Ja
43、nuary 1, 2011.,20,Discussion Among Participants,21,Implications/interpretations specific to real estate assets/investments,How are complex securities/assets treated under the amendments? How do direct real property holdings fit into the amendments? What role will Custodians play if statements are re
44、quired?,22,Practical first steps to take for conducting a review,Should you conduct a refresh analysis of the current status of custody within your firm? Dialogue with your Auditors/Accountants Need for implementation of compliance program guidance Update language within policy and procedures to ref
45、lect changes,23,Initial and potential challenges,Meeting the timeline 3/12/2010 Effective date 9/12/2010 Auditors 01/01/2011 Form ADV Areas of interpretation Custodian diligence/ “due inquiry” Direct delivery of account statements Determining which policies or procedures (Risk, Ops, Finance, etc.) relate to custody,Questions & Comments,