Co-authored by Gregory E. Xethalis.
On March 14, the Office of Compliance Inspections and Examinations of the Securities and Exchange Commission released a National Exam Program Risk Alert (Risk Alert). The Risk Alert discussed common deficiencies in respect of Rule 206(4)-2 under the Investment Advisers Act of 1940 (Custody Rule) that were reported by SEC staff in conducting investment adviser examinations.
In the Risk Alert, the SEC identified four primary categories of deficiencies:
- Failure by an adviser to recognize situations in which it has custody under the Custody Rule;
- Failure to meet the Custody Rule’s surprise examination requirements;
- Failure to satisfy certain “qualified custodian” requirements under the Custody Rule; and
- Failure to properly engage independent auditors or otherwise comply with the requirements for audits of pooled investment vehicles under the Custody Rule.
For additional details regarding the nature of the deficiencies commonly identified and SEC guidance on compliance with the Custody Rule, the Risk Alert may be found here.