The SEC Division of Investment Management prepared responses to questions received about the Custody Rule. The information below summarizes some of the frequently asked questions (FAQs) most seen in practice:
If the adviser does not return the securities to the sender within three business days, the adviser has custody and has violated the requirement that the client’s securities be maintained in an account with a qualified custodian.
Generally, yes.
No, the Rule only applies to clients’ funds and securities.
A period beginning no later than the date the RIA became subject to the surprise examination requirement through the examination date.
If the financial statements of the PIV are not audited and distributed as described above, the exceptions are not available. The RIA, among other things, must have a reasonable basis for believing that the qualified custodian sends quarterly account statements to each investor in the pool and must obtain an annual surprise examination with respect to the pool’s assets. The advisor must maintain privately offered securities owned by the pool with a qualified custodian.
Yes, and the audit must meet U.S. GAAS requirement
The Division has issued a letter that it would not recommend enforcement action to the SEC if an adviser relying on the Audit Provision Exception for a fund of funds distributes the audited financial statements to investors within 180 days from the end of the fund of funds’ fiscal year. A fund of funds is a PIV that invests 10% or more of its total assets in other PIVs that are not, and are not advised by, a related person of the pool, its GP, or its adviser. A “related person” of an adviser includes officers, partners, directors, most employees, and anyone controlled by, controlling, or under common control with the adviser.