March 14, 2018
Bookkeeping Service Considered Custody, Leads to Enforcement
WHAT HAPPENED?
The Securities and Exchange Commission (SEC) recently settled an enforcement action against Financial Fiduciaries, alleging that the adviser had custody of client assets through a “dual employee” who served in various outside business activities. The dual employee worked as a bookkeeper for a related firm that managed Financial Fiduciaries’ payroll, was employed by a trust company, and served as a trustee for certain clients of the adviser.
The SEC held that the dual employee reported directly to Financial Fiduciaries’ Chief Compliance Officer (CCO) The dual employee also received and deposited checks into the account and wrote checks from the account for trust clients of Financial Fiduciaries.
The SEC charged the for failing to comply with the custody rule with respect to the affected accounts and inadequate ADV disclosure. No clients were harmed by the violations and the firm’s Form ADV has since been updated to correctly disclose the conflict created with the trust company.
WHAT DOES THIS MEAN FOR ME?
Advisers should carefully vet outside business activities of employees and ensure conflicts of interest are adequately disclosed in the firm’s ADV. Outside activities that grant an employee the authority over assets in a third-party account should be scrutinized to determine if the custody rule is implicated.
For more information on this enforcement case please refer to the full SEC proceeding. For more information on the Custody rule please see the SEC Custody FAQs.
Sources:https://www.sec.gov/litigation/admin/2018/ia-4863.pdf
https://www.regcompliancewatch.com/ch/Investment-Adviser/Content/View?id=308933
https://www.sec.gov/divisions/investment/custody_faq_030510.htm
