Are My Assets Safe?
In light of past high-profile securities fraud cases and investment scams such as the Bernie Madoff scandal, the Stanford Financial Group, and continuous Ponzi schemes, we think it is important for our clients to know how their assets are secure with our organization.
As authorities investigated these schemes, especially Bernie Madoff, it became clear that neither investors nor institutions performed even cursory due diligence on Madoff, his operation, or the underlying investments (if there ever were any investments) before handing over their or their clients’ money. In short, there was a lot of “trust” – with no verification. Those potential investors and advisors who did try to obtain answers to basic due diligence questions quickly became suspicious and moved on.
In the case of Stanford, it appears suspiciously high yields were offered to clients investing in certificates of deposit in a related offshore bank.
Summarized below are some of the key factors ensuring the safety of our clients’ assets, the majority of which did not exist in the above-mentioned and other fraudulent security cases.
- Our clients’ assets are held and safeguarded by independent third party custodians (US Bank, Depository Trust Company (DTC), Matrix).
- Our investment offerings are transparent and diversified – our investment offerings are widely known and owned – and easily vetted by our clients.
- We use an independent third party trust accounting system for the detailed record-keeping of client accounts as well as separate third party performance reporting.
- As a fiduciary trust company, we are examined each year by the Office of Commissioner of Banks for the State of North Carolina.
- Our operations and internal controls are reviewed annually by an outside public accounting firm.
- We serve as the “back office” operations support for several bank clients. These banks performed their own due diligence of our organization and operations before engaging us. They require a separate audit of our activities specific to this operational support.
- Our firm is owned by shareholders who, with the exception of President & CEO Bill Smith and his brother, are unrelated by birth or marriage. In addition, none of our employees are related by birth or marriage.
First, and most importantly, we use independent third party custodians to hold and maintain all of our clients’ assets. US Bank serves as the custodian for all DTC-eligible client assets (stocks and bonds). Our clients’ mutual fund assets (including money market funds) are held at the respective fund company and cleared through Matrix Settlement and Clearing Services, a broker-dealer which serves over 300 financial institutions and processes over $200 billion in customer assets on their platform. The fact that Mr. Madoff did not use independent custodians is one of the linchpins that allowed him to pull off his scheme. This fact also caused many potential investors to quickly turn away.
Assets maintained in custodial accounts by custodial institutions are segregated from the assets and liabilities of the institution and are not subject to the institution’s creditors. The custodian’s role is to hold the assets for safekeeping, to collect dividends and interest and provide other similar services. Account ownership in the assets remains vested in the entities for whose benefit the institution is acting as custodian and the assets are not subject to the claims of creditors. In contrast, assets held in deposit accounts of a bank become liabilities of the bank. As such, deposits create a debtor-creditor relationship between the bank and the depositor. Similarly, if investors hold assets with an investment advisor who does not provide separate custody, these investors become general creditors of the investment advisors.
Our custodians employ comprehensive safeguards and controls over asset trading and transactions in their daily operations. Each year the custodial operations of both Matrix and US Bank endure a SSAE 16 examination. Officially known as a “Reporting on Controls at a Service Organization,” SSAE 16 audits provide independent third party verification by a licensed CPA firm as to whether control activities described by a service organization were suitably designed to meet specified control objectives and were in place and operating effectively over a specified period of time. Trust Company primarily requests a specific type of SSAE 16 audit called a Service Organization Control (SOC) Type 2 report. A SOC 2 report evaluates a provider’s security, availability, processing integrity, confidentiality, and privacy controls.
We have a great deal of daily interaction with our contacts at both Matrix and US Bank. We monitor our custodians’ service and capabilities and have a very high level of confidence in them to safeguard our clients’ assets. If we ever have concerns about a custodian’s service, we are free to, and will, move our clients’ assets to the care of another reputable and capable custodian.
As mentioned above, our investment offerings are very transparent and diversified. We utilize mutual funds that are easily verified and vetted – and are tracked and reported in a wide range of mediums. We do not recommend that our clients invest in “black boxes” or exotic schemes that cannot be easily explained or supported. It has been reported that Stanford Financial Group invested in certificates of deposit issued by a related offshore bank. All Trust Company of the South investments are “arm’s length” transactions with independent mutual fund companies or investment managers. We do not engage in related party transactions.
Unlike Bernie Madoff and other fraudsters, we report to our clients on how their assets are invested through use of an independent trust accounting system to maintain individual client accounts and transactions. We also use an independent third party for client performance reporting. In addition, clients can easily verify how any one of their investments is performing by looking in the business section of most newspapers or a host of other sources.
We use InnoTrust, the trust accounting and reporting system designed and maintained by Innovest Systems, LLC. It serves trust companies, trust and custody departments of banks, wealth management firms, and private banks. Innovest Systems, LLC was founded in 1974 and is based in New York. We have representatives on the users group that provides ongoing feedback and suggestions for further enhancements to the InnoTrust system. This system has its own comprehensive internal controls and reconciliations that are performed with the range of activities and operations allowed by the system. In addition, an annual SOC Type 2 audit is performed on the system and we receive and review the results of this audit. The SOC report also addresses the security of the data.
Beyond the daily back-up of our data on the InnoTrust system, the data also resides with the system provider, Innovest Systems, so there is an independent source for detailed client account information should some catastrophe strike our facilities or people.
Client accounts are reconciled daily with the custodial accounts of Trust Company of the South at US Bank and Matrix. These reconciliations are monitored daily by our internal operations team. Any exceptions, though rare, are investigated and addressed promptly.
In addition to the controls and processes used by independent custodians and trust accounting system, Trust Company of the South employs rigorous internal controls and separation of duties in managing client transactions and accounts. These controls minimize both employee errors and potential fraud. At least two people are involved with each client transaction – the person who enters the transaction and a second person who reviews the transaction entered into the system against the supporting documentation from the client. Once adequately reviewed, the transaction is authorized/approved by the reviewer. Also note that the trust accounting system will not allow the same person to both enter and approve a transaction. Beyond the separate entry and authorization of each client transaction, all transactions (disbursements, deposits, trades, etc.) are reviewed daily by our principal in charge of client services.
Our internal controls, processes and reporting related to maintenance of client accounts are reviewed each year as part of our required annual examination by the Office of Commissioner of Banks for the State of North Carolina.
Note we also have separate audits of our internal processes and procedures by an independent accounting firm, Crowe Horwath LLP. The Crowe Horwath auditors responsible for and performing our audit specialize in reviewing and testing internal controls for financial institutions. In addition, we serve as the “back office” for several banks who to date have chosen to outsource their operations. These banks performed their own due diligence of our capabilities in their decision to engage our firm and require a separate audit by Crowe Horwath of the specific functions we provide to them.
An independent audit of the financial statements of Trust Company of the South is performed each year by a public accounting firm. The auditors review and confirm our records of client accounts with the accounts of the custodians of our clients’ assets.
We also have a compliance officer who performs periodic reviews of client accounts, evaluates internal controls, and conducts random audits to ensure assets held with our custodians match what is held in our client accounts. These findings are reported to the Audit Committee of the Board of Directors of Trust Company of the South, who also oversee all risk compliance controls and meet on a regular basis throughout the year.
We realize that this is a lot of information to digest but we wanted to communicate some of the important safeguards and controls in place to protect our clients’ assets. You have placed your trust and your money with us. It is our job to maintain that trust.
Please contact us with any questions or if you would like to discuss further the areas outlined above.