On March 4, the SEC issued a Risk Alert on compliance with its custody rule for investment advisers and an Investor Bulletin on the rule which is designed to protect advisory clients from theft or misuse of their funds and securities. The alert comes after a review which identified significant deficiencies in about one-third of firms examined, including: (i) failure to recognize that they have custody; (ii) failure to meet surprise examination requirements; and (iii) failure to satisfy the rule’s qualified custodian requirements. SEC Release.
Custody Rule
SEC Custody Rule No-Action Letter
On July 21, the SEC provided no-action relief under Section 206(4) of the Investment Advisers Act of 1940 to investment advisers that for purposes of compliance with Rule 206(4)-2 (the “Custody Rule”), engage auditors for broker-dealers to: (i) perform surprise examinations required by the Custody Rule; (ii) prepare internal control reports; or (iii) audit the financial statements of a pooled investment vehicle. This no-action relief will expire upon the earlier of the approval of a permanent Public Company Accounting Oversight Board inspection program for broker-dealer auditors or December 13, 2013. SEC No-Action Letter.