Custody/RIA Audit Services


SEC RULE 206(4)-2

Internal Control Report

In December 2009, the US Securities and Exchange Commission (SEC) published the final rule amending the custody and recordkeeping rules of the Investment Advisers Act of 1940 (Advisers Act). The rule is more commonly referred to as the ‘SEC Custody Rule’ or the ‘Madoff Rule’. The amendments are intended to strengthen controls over the custody of client assets by registered investment advisers and to encourage the use of independent custodians, if an investment adviser registered with the SEC (aka Registered Investment Adviser (RIA)), has custody of client funds and securities (client assets). The amendments, among other areas require the RIA:

(i) Undergo an annual surprise exam by an independent public accountant to verify client assets and

(ii) Obtain an internal control report relating to the custody of client assets from an independent public accountant registered with the Public Company Accounting Oversight Board (PCAOB) if the RIA is or uses an affiliated qualified custodian

In connection with the final rule, the SEC issued new guidance to accountants regarding the surprise exams and internal control report. The final rule is effective March 12, 2010.

Summary of Amendments

Annual Surprise Exam

Rule 206(4)-2(a) requires that client funds and securities of which an RIA has custody under the rule be verified by actual examination at least once during each calendar year by an independent public accountant that is registered with, and subject to regular inspection by, the PCAOB (“accountant”), pursuant to a written agreement, between the investment adviser and the accountant, at a time that is chosen by the accountant without prior notice or announcement to the investment adviser and that is irregular from year to year. The objective of the accountant’s examination and internal control report is to verify that client funds and securities of which an investment adviser has custody are held by a qualified custodian in a separate account for each client under that client’s name, or in accounts that contain only clients’ funds and securities, under the investment adviser’s name as agent or trustee for the clients.

Internal Control Report

Rule 206(4)-2(a)(6) establishes additional requirements for an investment adviser that itself, or its related person, maintains client funds or securities as a qualified custodian in connection with advisory services provided to clients. Such, an investment adviser must at least once each calendar year obtain or receive from its related person an internal control report related to its or its affiliates’ custody services, including the safeguarding of funds and securities, prepared by an independent public accountant that is registered with, and subject to inspection by, the PCAOB. The objective of the examination supporting the internal control report is to obtain reasonable assurance that the qualified custodian’s controls have been placed in operation as of a specific date, and are suitably designed and are operating effectively to meet control objectives related to custody of funds and securities during the period specified. The internal control report should address control objectives and associated controls related to; the areas of client account setup and maintenance, authorization and processing of client transactions, security maintenance and setup, processing of income and corporate action transactions, reconciliation of funds and securities to depositories and other unaffiliated custodians, and client reporting. The internal control report may be a SAS 70 Report conducted in accordance with AU Section 324, Service Organizations (“AU 324”) of the AICPA auditing standards, an SSAE 16 examination or an examination on internal control conducted in accordance with AT 601. The RIA must maintain the internal control report and make it available to the SEC upon request.

Our Services

A-lign CPAs, LLC is an independent public accounting firm that is registered with, and subject to inspection by, the PCAOB and can provide the SAS 70 or SSAE 16 examination services to RIAs that must comply with these rules. Please see the relevant sections for a description of our SAS 70 or SSAE 16 service auditor methodology.

A-lign will work with your company to ensure that all aspects of the rules related to the annual surprise examination and the internal control report are adequately addressed, including filing of the relevant reports with the SEC per the requirements.

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