On December 16, 2009, the Securities and Exchange Commission (the “SEC”) adopted amendments to Rule 206(4)-2 (the “Custody Rule”) under the Investment Advisers Act of 1940. This represents just one of the many steps taken by the SEC to protect investors in the wake of a number of high-profile fraudulent schemes.
Approximately 30% of SEC-registered investment advisors have custody of client assets as defined by the Custody Rule. That means that they physically control the assets directly or through an affiliate. As a result, many clients understandably are concerned about whether their investment advisors are properly handling their hard-earned dollars.
Truepoint utilizes independent, qualified custodians to hold client money and securities as a protection against fraud. In turn, that qualified custodian sends a monthly or quarterly account statement directly to the client who can see whether the account statement reflects the assets the client believes exist. As a result, “the risk of client assets being misused is limited” asserts SEC Chairman, Mary Schapiro.
To further limit the potential for fraud, the Custody Rule imposes additional requirements:
- “The advisor must have a reasonable basis for believing that the qualified custodian sends an account statement, at least quarterly, to each client for which the qualified custodian maintains money and securities.” Truepoint is listed as an interested party on all client accounts and receives copies of periodic statements mailed to clients. We periodically conduct forensic tests to confirm that statements are being delivered to the client address that we have on file.
- Investment advisors that provide statements to clients in addition to those sent by the qualified custodian are required to include a notice urging clients to compare such statements to those provided by the custodian. Truepoint quarterly portfolio reports include this required notice.
We recommend reviewing all account statements and trade confirmations for any errors or any unauthorized transactions. Clients who see evidence of unauthorized trading or errors should notify us immediately.
While a lot of blame was assigned to the SEC for failures in the Madoff Ponzi scheme, individual investors bear some responsibility. Many investors could avoid trouble and potential losses if they ask some initial questions, verify the answers with information from independent sources and keep an eye out for the following red flags:
- If it sounds too good to be true, it probably is. Compare the returns promised with current returns on well-known stock indexes such as the S&P 500. Any opportunity that claims to provide substantially higher returns could be highly risky. And that means that the investor may lose money.
- “Guaranteed returns” aren’t. Low risk generally means low returns. High returns represent potential rewards for investors who are willing and financially able to take big risks. Be skeptical of a safe investment with “guaranteed” high returns.
- This once-in-a-lifetime opportunity will be gone tomorrow. Resist the pressure to invest quickly. Take time to investigate the investment before sending money. If the investment is legitimate, it will likely allow for due diligence by its prospective investors.
As a fiduciary, Truepoint has a duty to act solely in the best interest of each of our clients. To this end, we will continue to implement and monitor safeguards in order to protect your assets from fraud. If you have any questions, please don’t hesitate to contact us.