On December 30, 2009, the SEC adopted amendments to Rule 206(4)-2 under the Advisers Act, which regulates the custody practices of registered investment advisers. The SEC also adopted related amendments to Form ADV and Form ADV-E. The amendments, which will become effective 60 days after their publication in the Federal Register, are intended to improve the safekeeping of client assets when an adviser has custody of client funds and/or securities. The SEC has amended Rule 206(4)-2 by:
- Requiring that all advisers with custody of client assets engage an independent public accountant to conduct an annual surprise examination of client assets. (This requirement will not apply to advisers with custody of client assets solely because of their authority to deduct fees from client accounts or to advisers to pooled investment vehicles that are already subject to an annual audit.)
- Requiring 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: (1) conduct a surprise examination, with the first of such examinations to occur by December 31, 2010; (2) notify the SEC within one business day of finding a material discrepancy; (3) submit Form ADV-E to the SEC within 120 days of the time chosen for the surprise examination; and (4) submit Form ADV-E to the SEC within four business days of the accountant’s resignation from or termination of the engagement.
- Making privately-offered securities (as defined in the Rule) that advisers hold on behalf of their clients subject to the surprise examination.
- Providing 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.
- Requiring that when an adviser or a related person serves as a qualified custodian for client assets, the adviser 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 regarding 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).
- Requiring that when an adviser or a related person serves as a qualified custodian for client assets, the annual surprise examination be performed by an independent public accountant registered with the PCAOB.
- Requiring 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.
- Requiring advisers that send account statements separate from the ones the custodian delivers 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.
Registered advisers must provide responses to the revised Form ADV in their first annual amendment after January 1, 2011.