In February 2017, the staff of the SEC’s Division of Investment Management (the Staff) addressed circumstances in which an investment adviser may be deemed to inadvertently have custody of advisory client assets for purposes of Rule 206(4)-2 under the Investment Advisers Act of 1940 (the Custody Rule) because of the terms of the custodial agreement entered into between the advisory client and the qualified custodian, which would subject the investment adviser to the “surprise examination” requirement of the Custody Rule. Along those lines, the Staff provided noaction relief with respect to an investment adviser that acts pursuant to a standing letter of authorization satisfying the conditions set forth in the February guidance.
On June 5, 2018, the Staff provided additional guidance to questions regarding inadvertent custody under the Custody Rule. Specifically, the recent guidance provides that an investment adviser that does not have a copy of a client’s custodial agreement, and does not know, or have reason to know, whether the custodial agreement would give the investment adviser inadvertent custody, does not need to comply with the Custody Rule with respect to the client’s account if the sole basis for custody would be the terms of the custodial agreement. However, the Staff noted that this relief would not be available if the investment adviser recommended, requested or required a client’s custodian. As many investment advisers maintain a “preferred list” of qualified custodians for client accounts, this guidance may not provide a viable solution for many investment advisers.
The FAQs regarding the Custody Rule, as revised, are available at: