12.16.2009 The SEC held an open meeting at which it approved a change to the Advisers Act custody rule and also a requirement for enhanced proxy disclosure on risk, compensation and corporate governance.

The new custody rule provides safeguards where there is a heightened potential for fraud or theft of client assets. The new rule promotes independent custody and requires the use of independent public accountants as third-party monitors. Depending on the investment adviser’s custody arrangement, the rules would require the adviser to be subject to a surprise exam and custody controls review that are generally not required under existing rules. The new rule also imposes an important new control on advisers to hedge funds and other private funds that comply with the custody rule by obtaining an audit of the fund and delivering the fund’s financial statements to fund investors. The rule will require that the auditor of such a private fund be registered with and subject to regular inspection by the Public Company Accounting Oversight Board. The new rule also requires that the adviser reasonably believe that the client’s custodian delivers the account statements directly to the client, to provide greater assurance of the integrity of these account statements. It also will enable clients to compare the account statement they receive from their adviser to determine that the account transactions are proper.  

The proxy disclosure rules will improve corporate disclosure regarding risk, compensation and corporate governance matters when voting decisions are made. In particular, the new rules require disclosures in proxy and information statements about:

  • The relationship of a company’s compensation policies and practices to risk management;
  • The background and qualifications of directors and nominees;
  • Legal actions involving a company’s executive officers, directors and nominees;
  • The consideration of diversity in the process by which candidates for director are considered for nomination;
  • Board leadership structure and the board’s role in risk oversight;
  • Stock and option awards to company executives and directors; and
  • Potential conflicts of interests of compensation consultants.

Click http://www.sec.gov/rules/final/2009/ia-2968.pdf to access the release on the custody rule change.