Oct. 16, 2023
WHAT ARE THE DANGERS OF: Federal Register : Safeguarding Advisory Client Assets Some potential dangers to investors if robust safeguards are not implemented for advisory client assets include: - Misappropriation risk - Without proper controls and oversight, client assets are vulnerable to theft or misuse by bad actors. This can result in major losses. - Fraud risk - Weak custody controls create opportunities for Ponzi schemes or other frauds using commingled client funds. Investors may not detect problems until it's too late. - Operational risks - Advisers may inadvertently make errors or have inadequate systems for tracking client accounts and assets. This can lead to losses if issues are not caught. - Lack of transparency - Without detailed account statements and disclosures, investors have less visibility into how their assets are handled and maintained. It enables concealment. - Conflicts of interest - Advisers may engage in improper self-dealing or transfer assets to affiliated entities. Stronger separation and controls could reduce potential conflicts. - Loss of confidence - High-profile cases of custodial neglect or abuse can erode investor trust and confidence in the integrity of the advisory industry as a whole. - Delayed recovery - When assets go missing, insufficient audit trails and controls can make it harder for injured investors to trace and recover lost funds or securities. The SEC's enhanced custody rules aim to increase investor protections by ensuring advisers have stringent oversight programs and independent verification to deter, detect, and prevent misuse of client assets.