RIA Compliance Consultants
Thursday, October 01, 2009

A Registered Investment Adviser Needs to Ensure that Power of Attorney Over Client's Account Is Limited

In order to trade or otherwise access a client’s account held by a custodian, a registered investment adviser must be granted written authorization by the client. Such authorization is generally granted in the form of a power of attorney. Although a power of attorney over a client’s account is necessary for a registered investment adviser to manage the client's account, it is important for an investment adviser to ensure that the power of attorney is limited to only the functions actually intended by the client and the investment adviser.

Typically, an investment adviser’s limited power of attorney will grant a registered investment adviser the ability to only (1) trade the client’s account; (2) receive statements, confirmations and other documents such as proxies related to the account; and (3) make withdrawals from the account solely for the purpose of deducting the agreed upon investment advisory fees. Any additional authority over a client’s account is generally not needed or wanted by an investment adviser and subjects the investment adviser to additional regulatory scrutiny.

Unfortunately, registered investment advisers are occassionally granted full power of attorney on client accounts, but do not realize the ramifications that results from a full power of attorney. In addition to trading and receiving account documents, full power of attorney allows the investment adviser to transfer money to third parties, change the registration of the account, and completely liquidate and close the account. Under a full power of attorney, this can be done without the client’s consent. A full power of attorney is generally not needed and not desired by an investment adviser. Regardless of whether such authorization is intended or not, the investment adviser with a full power of attorney over a client's account will be deemed by most securities regulators as to have custody over the client account. When a state registered investment adviser is granted full power of attorney, the firm must comply with its state’s often onerous custody requirements. Under such circumstances, the SEC also performs greater scrutiny of custody situations during routine examinations.

Are you certain your firm’s power of attorney is limited to only the authorizations the firm needs to perform its investment advisory functions and does not provide for authorization that the firm does not want or use thus potentially subjecting the firm to needless regulatory requirements and scrutiny?

On October 8, 2009, RIA Compliance Consultants will be presenting its webcast titled “Auditing Investment Advisory Fee Calculations, Deductions and Refunds” during which some attention will be given to an investment adviser’s legal authority to withdraw advisory fees from client accounts and ensuring such authority is limited to only what is necessary. The webcast will also discuss custody ramifications relating to the deduction of advisory fees directly from client accounts.

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posted by bhill at 7:19 PM



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