Recently Amended Investment Adviser Custody Rule

The effective date for the amendments to Rules 206(4)-2 and 204-2 of the Investment Adviser Act of 1940 (the “Amendments”), and Forms ADV and ADV-E was March 12, 2010. Under the Amended Rules, a registered investment adviser that has “custody” of client assets is required to: 

  • Undergo an annual surprise examination by an independent public accountant to verify client assets. An investment adviser who is required to obtain a surprise examination must enter into a written agreement with an independent public accountant which states that the examination will take place by December 31, 2010. 
  • Have a reasonable basis for believing that the qualified custodian sends account statements directly to the advisory clients at least quarterly. 
  • If client assets are maintained by the investment advisor itself or a related person to the investment adviser, it must obtain or receive from its related person an annual report on the internal controls relating to custody of those assets from an independent public accountant that is registered with the PCAOB. An investment adviser must obtain or receive an internal control report within six months of the effective date.

For Hedge Funds, Private Equity Funds and Fund of Funds, an investment adviser may rely upon the audit provision exception and would therefore not be required to obtain a surprise examination if it becomes contractually obligated to obtain an audit of the financial statements of the pooled investment vehicle(s) for fiscal years beginning on or after January 1, 2010.

In order for an investment adviser to rely upon the audit provision exception the following criteria need to be complied with: 

  • The Auditor’s Report must be unqualified. 
  • The basis of accounting used for the financial statements is required to be U.S. Generally Accepted Accounting Principles. 
  • The audit is required to be performed in accordance with U.S. Generally Accepted Auditing Standards. 
  • The audit firm must be registered with, and subject to regular inspection by the PCAOB and maintain SEC level independence. 
  • The audited financial statements need to be distributed to investors within 120 days of year-end (180 for fund of funds).


Questions? Please contact Nancy Grimaldi or Nick Tsafos for any assistance or additional information.

This publication is intended to provide general information to our friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter. 

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