Custodial Firms Get Tougher About Registered Investment Adviser Compliance

According to Investment News, in the wake of the Bernie Madoff Ponzi scam and the recent financial meltdown, custodial firms are taking a tougher stance when it comes to the compliance they expect from registered investment advisers. This tighter scrutiny can make it hard for a new RIA with regulatory issues, as well as for investment advisers that are already at established custodial firms.

Trust Company America chief executive Frank Maiorano is quoted in the publication as saying that if “something came up” during a background check or the ADV, his firm would consider whether to let the RIA go. RBC Correspondent and Advisers says that it has had to ask advisers to leave. Schwab advisers are contractually obliged to tell the company about “material changes in status.” Schwab also monitors regulatory actions and may even look into “certain types of activities” occurring in advisers’ client accounts for red flags that could later impact the firm.

RIAs of both smaller and larger custodial firms are apparently feeling the heat from companies that are no longer willing to put up with potentially bad behavior that can lead to investment adviser fraud. This, even as most custodial firms continue to stay quiet about the type of due diligence they conduct on their advisers because they don’t want investors or plaintiffs’ lawyers to think of them as accountable for an adviser’s investment strategy or his/her supervision.

Just as custodial firms, which are service provider to advisers, are not responsible for supervising RIAs, they also cannot discipline them. They can, however, choose whether or not to work with an adviser.

Custodians usually will work with an independent review committee to vet new clients, conduct background and credit checks, and review ADV and U-4 forms. They may also look out for pending complaints, regulatory issues, and criminal actions.

Related Web Resources:
Custodians taking closer look at adviser compliance, Investment News, December 27, 2010

Investment Adviser, What you need to know before choosing one, SEC

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