The Securities and Exchange Commission has adopted amendments to Rule 206(4)-2, the custody rule under the Investment Advisers Act of 1940. When an advisor or its affiliate serves as custodian of client assets, the amended custody rule will now require the advisor to (i) engage an independent public accountant to conduct an annual surprise exam to verify that client assets exist (the accountants would be required to contact the SEC within one day if they discovered client assets were missing) and (ii) obtain a written report—prepared by an accountant that is registered with and subject to regular inspection by the Public Company Accounting Oversight Board (PCAOB)—that, among other things, describes the controls in place at the custodian, tests the operating effectiveness of those controls and provides the results of those tests (a SAS-70 report). An advisor maintaining client assets with an independent custodian generally would not be subject to the foregoing requirements, but would be required to undergo a surprise exam if it has the ability to write checks on or otherwise disburse client assets for any reason other than to collect the advisor’s fees. Advisors 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 will also not be subject to the foregoing requirements, provided that the auditor of the fund is registered with, and subject to regular inspection by, the PCAOB. The full text of the final rule amendment has not yet been published; we expect to be able to provide more information after it is released. The rule amendment will become effective 60 days after publication in the Federal Register.
Click here to read the SEC press release on the approved final rule amendments.
Click here to read the summary of the amendments as proposed in the May 22 edition of Corporate and Financial Weekly Digest.