Some of you may have received an email or letter from AMDG Financial, notifying you that you have been selected to participate in something called a “surprise custody audit.” The email or letter tells you to expect a DocuSign email from us, in which you’ll be asked to verify your holdings and confirm your transactions. If you’ve never participated in something like this before, you’re probably not sure what’s going on, and not sure how to respond! I thought I’d take a few moments to explain what a surprise custody audit is, and why you’re being asked to participate.
The SEC’s Custody Rule
The U.S. Securities and Exchange Commission created the so-called “custody rule” (Rule 206(4)-2 of the Investment Advisers Act of 1940) to protect clients from situations in which their funds become “lost, misused, misappropriated or subject to investments adviser’s financial reverses, including insolvency.” A Registered Investment Adviser (RIA), such as AMDG Financial, is deemed to have custody when it holds “directly or indirectly, client funds or securities or has any authority to obtain possession of them.” The SEC offers several examples of “custody” in its guidance, but in short, if we have the ability to withdraw funds or securities from your account, or have the authority to deduct our fees from your account, the SEC considers us to have custody.
Although the SEC considers it perfectly legal for RIAs to have custody of client funds, having custody subjects RIAs to additional SEC oversight. That’s where the “surprise audit” comes in. According to the SEC’s guidance, firms that have custody must hire an independent, outside audit firm to do a surprise exam once a year. The audit firm gets to choose when the exam will happen, so AMDG Financial must be prepared for the audit to happen at any time. We recently received word from our audit firm, Cohen & Company, that our audit is happening now.
What You Can Expect
As part of the audit, Cohen & Company reviews our client records and chooses a select group whose holdings and transactions they’d like to verify. If you received an email or letter from us, that means that Cohen & Company has chosen to include your account in the audit. During this process, your account information remains secure, with only those who need to conduct the review gaining access to your information. Once you have verified your account information, your role in the audit is complete unless Cohen & Company finds a discrepancy.
Why Your Prompt Response Is Important
We know our clients have busy lives, and that participating in an audit may not be something you would happily place at the top of your to-do list! However, your prompt cooperation can help the audit run smoothly and conclude on schedule. And if we’ve done our job properly, the audit result will serve as one more reason you can feel comfortable working with AMDG Financial.
If you have any questions about the audit, your account, or your role in verifying your information, please feel free to contact us. We look forward to another successful audit again this year.