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SEC Adopts Adviser Custody Rule Amendments; FundLaw Anniversary

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    The Securities and Exchange Commission has adopted rule amendments to strengthen its custody requirements when a registered investment adviser or an affiliate
    Message 1 of 1 , Dec 31, 2009
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      The Securities and Exchange Commission has adopted rule amendments to strengthen its custody requirements when a registered investment adviser or an affiliate has custody of client funds or securities. Release No. IA-2968 (Dec. 30, 2009). The amendments generally require advisers that have or are deemed to have custody of client securities or funds to have an annual surprise examination by an independent public accountant; to have the qualified custodian maintaining client funds and securities send account statements directly to the advisory clients; and, unless client assets are maintained by an independent custodian, to obtain a report of the internal controls relating to the custody of those assets from an independent public accountant that is registered with the Public Company Accounting Oversight Board. The amendments also revise applicable client disclosure and Form ADV requirements, and hedge funds and other private investment vehicles are subject to enhanced audit and account statement requirements. However, the SEC did not adopt the most controversial provision of its proposal, which would have subjected advisers to the surprise examination requirement if they are deemed to have custody solely because they have authority to make withdrawals from client accounts to pay their advisory fees. The rule amendments also do not apply to the assets of registered investment companies, which already have strict custody requirements.

      The amendments will be effective 60 days after the adopting release is published in the Federal Register, and advisers will be required to comply with the new client notification requirements on that date. Delayed compliance dates are available for the surprise examination, internal control report, private investment vehicle audit, and Form ADV requirements. Most registered advisers will have to revise their compliance policies and procedures in response to the rule changes.

      With this post I celebrate ten years of activity for FundLaw. The first public post, "NASD Sales Charges Rule Change," was distributed on December 13, 1999. Now I'm at post 1265. FundLaw has 1103 registered members, although there are many people who read it online or have posts forwarded to them.

      But why, you may wonder, has FundLaw been so inactive over the past six weeks? There is a reason for that. On November 23, I was admitted to Johns Hopkins Hospital for a pancreaticoduodenectomy, which removes the head of the pancreas, part of the small intestine, and some smaller nearby organs. It turns out that I had something in common with Steve Jobs: an islet cell tumor, a rare kind of neoplasm found in the pancreas (and, I hasten to add, much less dangerous than conventional pancreatic cancer, which is usually fatal). My surgeon has pronounced me cured, and any recurrence is unlikely, so there is no reason that FundLaw cannot continue for years to come.

      The SEC's adopting release for its adviser custody rule amendments is available online at


      The SEC has also issued an interpretive release providing guidance for accountants in performing their functions under the amended rule. Release Nos. IA-2969, FR-81 (Dec. 30, 2009). That release is available online at


      John M. Baker <JMB@...>
      Stradley Ronon Stevens & Young, LLP http://www.stradley.com
      1250 Connecticut Avenue, NW, Suite 500
      Washington, DC 20036
      202.822.0140 fax
      FundLaw Listowner http://groups.yahoo.com/group/fundlaw
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