Investment advisers that have custody of client funds or securities are required to undergo an annual surprise examination by an independent public accountant to verify client funds and securities. Form ADV-E is used as a cover page for a certificate of accounting of securities and funds of which the investment adviser has custody, aka a surprise exam report. Form ADV-E contains both information about the adviser and the surprise exam conducted. The Form ADV-E is filled out by the investment adviser and then submitted along with the surprise examination report or statement by the independent public accountant after a surprise inspection of the adviser.
Structure of Form ADV-E
A complete ADV-E filing consists of a uniform cover page and a certificate of accounting (surprise examination report or termination statement) of securities and funds in possession or custody of an investment adviser. The surprise examination report is created by an independent accountant after a surprise inspection of the adviser/custodian. Also, the Form ADV-E filing and the surprise examination report or statement filed by the accountant will be made public information and will be available to the public on www.adviserinfo.sec.gov.
Surprise Examination
If the Adviser has custody of client assets, it must enter into a written agreement with an independent public accountant to examine those assets on a surprise basis every year. The accountant performing the “surprise” examination will contact some, or all, advisory clients to confirm their holdings with those listed on the records of the Adviser. Furthermore, the engagement of the independent public accountant must be done pursuant to a written agreement, and such agreement must:
- Provide for the first examination to occur no later than six months (following the engagement);
- Require the accountant to file a certificate on Form ADV-E within 120 days of the time chosen by the accountant, stating that the accountant has examined the funds and securities and describing the nature and extent of the examination; and
- Provide that upon finding any material discrepancies during the course of the examination, the accountant must notify the SEC within one business day and upon resignation, dismissal, or termination of the accountant’s engagement, the accountant must file Form ADV-E within four business days.
After conducting the examination, the independent public accountant will have to create a surprise examination report to provide to the investment advisor to include in their Form ADV-E.
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