On May 14, 2009, the SEC proposed amendments to Rule 206(4)-2 under the Advisers Act, which regulates the custody practices of registered investment advisers. The SEC also proposed related amendments to Form ADV and Form ADV-E. The amendments are intended to improve the safekeeping of client assets when an adviser has custody of client funds and/or securities. The SEC is proposing to amend Rule 206(4)-2 to:
- Require that all advisers with custody of client assets engage an independent public accountant to conduct an annual surprise examination of client assets. (Under the current Rule, a surprise examination is not require for accounts for which the adviser has a reasonable belief that a qualified custodian provides account statements directly to the client.)
- Require advisers with custody of client assets to enter into a written agreement with an independent public accountant that, among other things, obligates the accountant to: (i) conduct a surprise examination; (ii) notify the SEC within one business day of finding a material discrepancy; (iii) submit Form ADV-E to the SEC within 120 days of the time chosen for the surprise examination; and (iv) submit Form ADV-E to the SEC within four business days of the accountant’s resignation from or termination of the engagement.
- Make privately offered securities (as defined in the Rule) that advisers hold on behalf of their clients subject to the surprise examination. (Privately offered securities are not currently subject to any part of the Rule.)
- Provide that an adviser is deemed to have custody of any client securities or funds that are directly or indirectly held by a related person of the adviser (i.e., a person directly or indirectly controlling or controlled by the adviser or any person under common control with the adviser) in connection with advisory services provided by the adviser to its clients.
- Require that when an adviser or a related person serves as a qualified custodian for client assets, the adviser must obtain, or receive from the related person, an annual written internal control report from an independent public accountant registered with the Public Company Accounting Oversight Board regarding the adviser’s or the related person’s controls relating to custody of client assets, which includes an opinion of the accountant regarding the custody controls in place and tests of their effectiveness (e.g., a Type II SAS 70 Report).
- Require that when an adviser or a related person serves as a qualified custodian for client assets, the annual surprise examination must be performed by an independent public accountant registered with the PCAOB.
- Require advisers with custody of client assets to have a reasonable belief based on due inquiry that the qualified custodian sends an account statement, at least quarterly, to each client for which the qualified custodian maintains assets.
- Require advisers to include a statement in the notice sent to clients upon opening a custodial account on their behalf that the client should compare the account statements they receive from the custodian with those they receive from the adviser.
Comments on the proposals are due by July 28, 2009.