Final answer:
A registered investment adviser is required to provide an audited balance sheet when having custody of client funds or securities. Discretionary authority alone does not necessarily require an audited balance sheet unless custody is also involved. The specific requirements can vary by jurisdiction and under the rules of the regulatory body.
Step-by-step explanation:
In the context of financial regulation, a registered investment adviser (RIA) is generally required to provide an audited balance sheet when they have custody of client funds or securities. If an RIA merely has discretionary authority, which means they have the authority to make investment decisions on behalf of a client without the client's consent before each transaction, an audited balance sheet may not be strictly necessary unless they also have custody. However, the specific requirements can vary by jurisdiction and under the rules of the regulatory body that governs RIAs which, in the United States, includes the Securities and Exchange Commission (SEC) and state securities authorities.
Under SEC rules, custody includes not only holding client funds and securities but also having the authority to withdraw client funds or securities. If an RIA has such custody, they must undergo an annual audit and file an audited balance sheet with the SEC to demonstrate the adequate protection of client assets. This is to provide assurance to clients that their assets are being handled properly and to help prevent misappropriation or fraud. Advisors with discretionary authority, but without custody, may be subject to different financial reporting requirements that do not necessarily include an audited balance sheet.
It's important for RIAs to understand the regulations and reporting requirements of their particular jurisdiction and regulatory authority to ensure they are in full compliance.