Alert August 02, 2011

SEC Staff Provides Additional Relief from Advisers Act Custody Rule Requirements Affecting Use of Auditors to Broker-Dealers

In 2010, the staff of the SEC’s Division of Investment Management (the “Staff”) provided no‑action relief to allow an investment adviser to engage an auditor registered with, but not subject to, regular inspection by the Public Company Accounting Oversight Board (the “PCAOB”) to audit the financial statements of a pooled investment vehicle for purposes of complying with the annual financial statement requirement of paragraph (b)(4) of Rule 206(4)‑2 under the Investment Advisers Act of 1940 (the “Custody Rule”).  This relief was necessitated by the fact that investment advisers had engaged PCAOB-registered auditors whose clients were broker-dealers to audit the financial statements for the advisers’ private funds; those auditors, however, did not meet the Custody Rule’s requirement that such auditors be regularly inspected by the PCAOB, which only inspected auditors to public companies.  With the 2010 relief due to expire on July 21, 2011, the Staff provided further relief to allow an adviser to engage a PCAOB-registered auditor for broker-dealers to (1) perform  surprise examinations required by the Custody Rule, (2) prepare internal control reports required by the Custody Rule, or (3) audit the annual financial statements of a pooled investment vehicle.  The additional relief expires upon the earlier of the approval of a permanent PCAOB inspection program for broker‑dealer auditors or December 31, 2013.  The PCAOB recently adopted a temporary rule providing for the inspection of broker‑dealer auditors and has indicated that it anticipates being in a position to propose rules for a permanent inspection program by 2013.