Make Sure You’re in Compliance with the Custody Rule
Earlier this year, the Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert regarding their findings on non-compliance with the custody rule. As to the audit exception requirements, the OCIE staff highlighted several problem areas to be aware of:
- The investment advisor needs to confirm that the fund auditor is independent and the auditor is registered with and inspected by the Public Company Accounting Oversight Board.
- For each year of operations, the hedge fund’s financial statements have been prepared in accordance with U.S. GAAP.
- The auditor’s report is unqualified.
- The auditor should confirm that the financial statements and audit process satisfy the custody rule for funds that are eligible to use accounting standards other than U.S. GAAP.
- Investment advisors should document that the financial statements were delivered to investors within the time frames prescribed by the rule.
- A final audit must be performed in the year of the fund’s dissolution.