Investment Management Alert
May 2009
Authors:
Michael S. Caccese
michael.caccese@klgates.com
+1.617.261.3133
Rebecca O’Brien Radford
rebecca.radford@klgates.com
+1.617.261.3244
Pamela Grossetti
SEC Proposes Amendments Fortifying the
Custody Rule
The Securities and Exchange Commission (“SEC”) in a unanimous decision on May
14, 2009, proposed a series of amendments to rule 206(4)-2 under the Investment
Advisers Act of 1940 (the “Custody Rule”) in order to better protect client funds
controlled by investment advisers.1 The SEC is proposing increased oversight of
investment advisers who retain control over client assets. The proposed rule changes
would require:
pamela.grossetti@klgates.com
+1.617.951.9194
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•
all investment advisers with custody of client assets to undergo an annual
surprise audit;
•
investment advisers whose client assets are not held at an independent custodian
to obtain a custody control review (also known as a SAS-70 report); and
•
all custodians to directly deliver account statements to advisory clients.
In order to ensure the safekeeping of investor assets, the proposed amendments
would establish independent public accountants as watchdogs, responsible not only
for conducting surprise audits and custody control reviews, but also for alerting the
SEC and investors to any potential problems, including any material discrepancies
found during a surprise examination. Additionally, under the proposal accountants
would be required to report the termination of any engagement with an investment
adviser related to their custody review and any problems that led to such termination.
Another proposed amendment is intended to protect investment adviser clients from
unscrupulous investment advisers that may prepare false account statements. The
amendment would require all custodians holding client assets to directly deliver
custodial statements to clients. In addition, investment advisers opening custody
accounts for clients would need to instruct those clients to compare the account
statements they receive from the custodian with information they receive from the
investment adviser.
It is unclear how the proposed revisions will apply to hedge fund managers that
maintain their funds’ assets with qualified custodians; we hope that the formal
written proposal will address this issue. The proposal will remain open for public
comment for 60 days following the publishing of the proposed rule.
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Press Release 2009-109, SEC Proposes Rule Amendments to Strengthen Safeguards of
Investor Funds Controlled by Investment Advisers, May 14, 2009.
Investment Management Alert
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©2009 K&L Gates LLP. All Rights Reserved
May 2009
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