IAA calls for segregation of duties at advisory firms

Investment advisory firms should be able to hold custody of client assets so long as advisory functions are separated from custodial functions, according to the Investment Adviser Association.
It’s a new stance for the IAA of Washington, which recommended back in December — after the alleged massive fraud at New York-based Bernard L. Madoff Investments LLC became public — that advisory firms have independent custodians to help protect client assets. That idea has since been championed by congressional financial service leaders.
But in a letter last week to Securities and Exchange Commission Chairman Mary Schapiro, the IAA wrote that advisory firms that separate custodial and advisory duties, and implement other internal controls, should be permitted.
“Segregation of duties makes it extremely difficult for any one person to perpetrate and hide a fraud,” said the letter, which was signed by IAA general counsel Karen Barr.
The IAA said controls could be modeled on those required under banking regulations. Furthermore, self-custody of assets by advisory firms should only be allowed if there is independent auditing of controls, the letter said. Firms that hold custody of assets and are dually registered as investment advisers and broker-dealers should be examined on a regular basis, and unregistered hedge funds should be required to register, the IAA said.