Spotlight

The Cornell Securities Law Clinic has filed a Comment Letter in support of a Rule Proposal by the Securities and Exchange Commission which would increase protections for investors using investment advisers.

The Rule Proposal sought to improve the safekeeping of client assets by requiring all registered investment advisers with custody of client assets to undergo an annual surprise examination. Additional changes included (1) requiring investment advisers to obtain internal control reports from independent public accountants if the advisers also served as qualified custodians; (2) deeming investment advisers to have custody over client assets if any of their related persons had custody of the client assets; (3) requiring investment advisers to have a reasonable belief that the qualified custodian was sending account statements to each client; and (4) amending Forms ADV and ADV-E to require more information from registered advisers.

The Clinic generally supported the Rule Proposal, with certain modifications as discussed in the Clinic's Comment Letter. The Clinic believed that the Rule Proposal correctly provided an independent mechanism for verifying misuse or misappropriation of client assets in custody of registered advisers. In addition, the Clinic generally supported the four mentioned amendments because the amendments enhanced the protection of client assets.

The Clinic, however, suggested that the SEC modify the Rule Proposal to provide that the surprise examination requirement should not apply to registered advisers who utilized an independent qualified custodian which maintained custody of funds and securities, and directly sent statements to clients, where the only control exercised by the investment adviser is deduction of fees pursuant to written agreement with the customer.

Securities Law Clinic summer intern Sang Joon Kim '11 was responsible for researching and drafting the Comment Letter.