Surprise! It’s Examination Time for Investment Advisors

IRS Examinations - Delaware CPA FirmInvestment advisers registered with the Securities and Exchange Commission (SEC) across the country should remain on alert for the annual surprise examination that they must undergo. However, this type of surprise is not as fun as a surprise birthday party, so let’s get up to speed on what a surprise examination is about.


In 2009, the SEC issued its final ruling on the custody and recordkeeping rules under the Investment Advisers Act of 1940 (Act). The amendments that were adopted were to provide further transparency and assurance to the Commission and the public regarding their practices. The two rules under focus are 204-2(b) and 206(4)-2(a).

  • Rule 204-2(b) requires registered investment advisers to record all transactions for their clients whose funds and/or securities are under their custody or possession in a separate ledger account. The Act also mandates that the adviser maintain confirmations of these transactions.
  • Rule 206(4)-2(a) stipulates that any client funds or securities should be in a separate account for each client or in an account that contains only that client’s funds and securities.
  • The SEC also requires an annual “surprise examination by an independent public accountant” to express an opinion on management’s assertion on these rules and more.

Violation Update

In October 2013, the SEC found three registered investment advisors to be in violation of the above-mentioned rulings, amongst other violations of the federal securities laws. These firms would eventually settle for six-digit penalties. At the time, the co-director of the SEC’s Division of Enforcement, Andrew Ceresney, had the following to say:

“The heart of the relationship between advisers and their customers is the safety of client assets.  Surprise exams or procedures associated with audited financial statements provide additional safeguards against assets being stolen or misused. These firms failed to comply with their custody rule obligations, and other firms who hold client assets should take notice that we will vigorously enforce such requirements.” – (Source: SEC Press Release 2013-230)

The words chosen by the co-director should be more than enough reason for a registered investment adviser to contact a CPA firm and have their surprise exams conducted.

Have Questions?

For additional information on compliance examinations, visit our website or contact our compliance examination team.

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