Client Advisor - Recently Amended Registered Investment Advisor Custody Rule

The effective date for the amendments to Rules 206(4)-2 and 204-2 of the Investment Adviser Act of 1940 (the "Amendments"), and Forms ADV and ADV-E was March 12, 2010. Under the Amended Rules, a registered investment adviser that has "custody" of client assets is required to:

  • Undergo an annual surprise examination by an independent public accountant to verify client assets.
  • Enter into a written agreement with an independent public accountant which states that the examination will take place by December 31, 2010.
  • Have a reasonable basis for believing that the qualified custodian sends account statements directly to the advisory clients at least quarterly.
  • Obtain or receive from related parties, who maintain custody on their behalf, an annual report on the internal controls relating to custody of those assets from an independent public accountant that is registered with the PCAOB within six months of the effective date.

For Hedge Funds, Private Equity Funds and Fund of Funds, a registered investment adviser may rely upon the audit provision exception and would therefore not be required to obtain a surprise examination if it becomes contractually obligated to obtain an audit of the financial statements of the pooled investment vehicle(s) for fiscal years beginning on or after January 1, 2010.

In order for an investment adviser to rely upon the audit provision exception the following criteria need to be complied with:

  • The Auditor's Report must be unqualified.
  • The basis of accounting used for the financial statements is required to be U.S. Generally Accepted Accounting Principles.
  • The audit is required to be performed in accordance with U.S. Generally Accepted Auditing Standards.
  • The audit firm must be registered with, and subject to regular inspection by the PCAOB and maintain SEC level independence.
  • The audited financial statements need to be distributed to investors within 120 days of year-end (180 for fund of funds).

 ###

Questions? For assistance or additional information, please contact:
Danielle Kimmell, CPA, partner
Email

Dave Roberts, CPA, sr. manager
Email

 

Any tax advice in this communication is not intended or written by Bober Markey Fedorovich to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer, or (ii) promoting, marketing, or recommending to another party any matters addressed herein. With this alert, Bober Markey Fedorovich is not rendering any specific advice to the reader.


This publication has been prepared by EisnerAmper LLP for informational purposes only. These materials do not constitute accounting, tax or legal advice and cannot be relied upon by any taxpayer for the purpose of avoiding penalties imposed under the Internal Revenue Code.


Redistributed by Bober Markey Fedorovich with permission.