Tuesday, January 12, 2010

SEC Amends Custody Rules Under Advisers Act

On December 30, 2009, the SEC adopted amendments to strengthen the custody and recordkeeping rules under the Investment Advisers Act of 1940.  The rules amendments, which will become effective on March 12, 2010, are intended to prevent fraudulent activity by investment advisers or custodians who have custody over client assets. 

The final adopted rules amendments are less burdensome for registered advisers to private funds as those that were originally proposed in May 2009.  As originally proposed, the rules amendments would have required that an independent public accountant conduct an annual surprise audit of all client accounts in the actual or constructive custody of a registered investment adviser.  However, the final rules contain an exception to this surprise audit requirement for an adviser to a pooled investment vehicle that is subject to an annual financial statement audit by a PCAOB-registered independent public accountant and distributes audited financial statements to its underlying investors within 120 days of fiscal year-end.  Such an adviser will also be required to obtain an audit of the pooled investment vehicle upon the pool's liquidation and promptly distribute audited financial statements to investors after the completion of such audit.