At its open meeting on December 16, 2009, the SEC adopted amendments to Rule 206(4)-2 under the Investment Advisers Act of 1940, which addresses custody of client assets by registered advisers. The SEC has not posted a formal release for the amendments. The press release describing this action focuses on three new requirements. First, an independent public accountant must conduct an annual "surprise exam" of an adviser that has custody of client assets as defined under the Rule to verify that client assets exist, and the accountant must report to the SEC if client assets are missing. In her remarks at the open meeting, SEC Chairman Mary L. Schapiro indicated that the surprise exam requirement will not apply when an adviser is deemed to have custody because an affiliate has custody of clients assets, provided the adviser is operationally independent of the affiliated custodian, i.e., there is no overlap of personnel or office space, and no common supervision. Second, when an adviser or its affiliate serves as custodian of client assets, the adviser must obtain a custody controls report prepared by an accountant registered with and subject to regular inspection by the PCAOB. Finally, advisers to "hedge funds and other private funds" that comply with the custody rule by delivering audited fund financial statements to fund investors must use an auditor registered with and subject to regular inspection by the PCAOB to conduct the audit. The effective date of these amendments is 60 days after their publication in the Federal Register.
Alert December 22, 2009