surprise examination – the results of which must be reported to the Commission – an independent public accountant generally must (i) confirm with the custodian all cash and securities held by the custodian and 1 Proposed Rule: Custody of Funds or Securities of … The revised custody rule also requires each adviser that must obtain a surprise examination to enter into a written agreement with the independent public accountant that will conduct the surprise examination. The SEC requires that seven conditions be met in order for advisors to avoid the custody rule’s annual surprise exam requirement. The Custody Rule. The Custody Rule for Registered Investment Advisors The contents of this presentation have been prepared for educational and information purposes ... • Have an independent public accountant perform an annual “surprise” examination verifying the funds and securities under the advisor’s “custody” pursuant to a written agreement. The bad news about the amended custody rule is the surprise examination requirement. ‘no-action’ letter providing additional guidance on how the Custody Rule applies to third-party money movement authority. In December 2009, the SEC approved amendments to the custody rule under the Investment Advisers Act of 1940 and related forms. One such rule under the Investment Advisers Act of 1940 – the “custody rule” (i.e., SEC Rule 206 (4)) – requires RIAs to obtain external assurance for customer … Investment advisers that have custody of client assets are subject to an annual surprise examination of those assets by an independent public accountant under the amended custody rule, unless the adviser has custody solely because of its authority to deduct advisory fees from client accounts or it is an adviser to a pooled investment vehicle that is subject to an annual … The custody rule deems it a “fraudulent, deceptive or manipulative act, practice or course of business” for an SEC-registered investment adviser to have custody of client assets unless it complies with several requirements designed to create greater transparency and safeguard the assets from misappropriation or other misuse. Other Custody Articles. the Custody Rule if a registered adviser did not obtain a surprise examination where it acts pursuant to a SLOA under the following circumstances: The client provides an instruction to the qualified custodian, in writing, that The good news, at least for many hedge fund managers, is the annual audit exception. questions about the rule 206(4)-2, the "custody rule" under the Investment Advisers Act of 1940. data on surprise examination costs and, if applicable, internal control reports. Current State of Affairs On The SEC Custody Rule In brief, the custody rule is designed to provide for the safekeeping of investor funds and securities, and to prevent such funds and securities from being misused or misappropriated by advisers. In order to assess an advisor’s compliance with the Custody Rule, the accountant first needs to obtain, from the advisor, a list of open and closed accounts that are subject to surprise examination due to an advisor’s custody of client funds. Earlier this year, we outlined a number of common scenarios which an registered investment adviser (RIA) firm may be deemed to have custody of client funds or securities.One of the key SEC investment adviser compliance requirements for a RIA firm deemed to have custody is the independent surprise examination requirement performed by an accounting firm which is … We understand and follow the strict Recent SEC staff no-action letter allows certain sub-advisers to avoid the burdensome surprise examination requirement under the Custody Rule. May 13, 2016. Registered Adviser Custody Rules SEC Adopts Final Rules and Issues Guidance to Safeguard the Custody of Client Assets by Investment Advisers SUMMARY The SEC has adopted and published amendments to Rule 206(4)-2 under the Investment Advisers Act of 1940 which, once effective, will require: • Annual Surprise Examination. Surprise Examination. In some cases, advisers are … The surprise inspection component of the Custody Rule makes up one of the first lines of defense in terms of ensuring that investment advisors are ensuring the safety of client assets. Surprise Custody Examination To protect investors who entrust their funds and securities to registered investment advisers (RIAs), the SEC adopted amendments to the Custody Rule 206(4)-2 under the Advisers Act of 1940. FGMK is registered with the Public Company Accounting Oversight Board (PCAOB) and has the expertise to guide you through this ever changing landscape to ensure that your independent … Because the annual surprise exam is the most draconian element of the custody rule, this “but” was deemed a victory for the industry after the 2009 custody rule amendments were adopted. Custody Rule Basics. As with other recent FAQs, this delay also is due to the spread of COVID-19 (RCW, March 26, 2020).The custody rule requires an accountant to complete its surprise exam and upload its Form ADV-E certificate within a 120-day deadline. ‘The Custody Rule’ explained; Rule 206(4)-2; Determining if your firm has custody; Frequently asked questions; We have custody, now what? However, the SEC also provided some relief for RIAs as it relates to the independent surprise examination requirement of the Custody Rule. The Securities and Exchange Commission (SEC) continues to expand regulations impacting Registered Investment Advisors (RIA) when an RIA has custody of client assets. On April 25, the US Securities and Exchange Commission Recent SEC staff no-action letter allows certain sub-advisers to avoid the burdensome surprise examination requirement under the Custody Rule. The Custody Rule (Rule 206 (4)-2) requires that advisers custody client funds and securities with a qualified custodian. An auditor needs to address both the Custody Rule and Recordkeeping Rule requirements in its surprise examination. Surprise Examination The final rule requires registered advisers with custody of client assets to engage an independent public accountant to conduct an annual surprise examination of client assets, subject to exceptions for certain advisers described below. For example, in 2017, the Investment Adviser Association obtained relief from the surprise examination requirement for investment advisers exercising limit-ed authority over client accounts pursu- On April 25, the US Securities and Exchange Commission (SEC) staff provided limited but important no-action relief from the … Earlier this year, the SEC amended its custody rule, Rule 206(4)-2, to impose new requirements on investment advisers deemed to have "custody" of client assets. Surprise Annual Examination. Earlier this year, the SEC amended its custody rule, Rule 206(4)-2, to impose new requirements on investment advisers deemed to have "custody" of client assets. When must the qualified custodian send the first account statements directly t… 6. Custody Rule Examinations On December 30, 2009, the Securities and Exchange Commission adopted amendments to the custody and recordkeeping rules under the Investment Advisers Act of 1940. All investment advisers licensed or required to be licensed in California must comply with the New Custody Rule. As discussed in a previous Tonkon Tip, an adviser is deemed to have custody if the adviser (or an employee of … The staff of the Securities and Exchange Commission (the “SEC”) recently issued a Risk Alert highlighting violations of the Custody Rule. Second, the Custody Rule requires the accounting firm performing either a surprise examination or financial statement audit to meet the auditor independence standards set forth in Regulation S-X. Sub-Advisers Get Relief from Custody Rule’s Surprise Exam Requirement. Investment adviser custody rule : Surprise exam : Securities|INVESTMENT ADVISER CUSTODY RULE. The SEC press release highlights the two biggest changes: Surprise Exam “The adviser is now required to engage an independent public accountant to conduct an annual “surprise exam” to verify that client assets exist. The Custody Rule Revisited. The Custody Rule requires that the audited financial statements be distributed to all investors with-in 120 after the end of each fiscal year end (180 days for fund of funds and 260 days for fund-of-fund-of-funds). The SEC has amended its custody rule, Rule 206(4)-2, under the Investment Advisers Act of 1940 which directly applies to investment advisers who fall under Rule 206(4)-2 and are registered with the SEC. Your Accounting Firm Must Be Registered With the PCAOB United States: SEC´s Proposed Amendments To Custody Rule Would Require Surprise Exams And Internal Control Reports 26 June 2009 . As originally proposed by the SEC, advisers with fee debiting authority would have been required to undergo the annual surprise exam. The Custody Rule was ... (Quarterly Statements); and (4) an annual surprise examination of the custodied funds and securities, done by an independent accountant (Annual Surprise Exam), who is then required to file a Form ADV-E with the SEC. Under the custody rule, an adviser to a pooled investment vehicle that is subject to an annual audit by an independent public accountant registered with, and subject to regular inspection by the PCAOB and distributes the audited financial statements to each investor in the pool within 120 days after the pool's fiscal year end is deemed to have satisfied the requirement … A typical Surprise Custody Examination may include the following procedures: Confirmation with the qualified custodians of client funds and securities as of the date of the examination and that the client’s funds and securities are held in either a separate account under the client’s name or in accounts under the name of the investment adviser as agent or trustee for clients. Surprise Custody Examinations. With our extensive experience working with investment advisors of separately managed accounts and funds, we conduct efficient and cost effective surprise exams that satisfy our client’s regulatory needs. However, until these rules are adopted and take effect, many advisers would be unable to rely on the Annual Audit Provision of the Custody Rule, and such advisers would be subject to the surprise examination requirement under the Custody Rule or would be required to replace their current auditors until the new PCAOB inspection rules take effect. 5. (See app. custody rule would, among other things: (i) require all registered investment advisers with custody of client assets to undergo an annual “surprise” examination; (ii) where a registered investment adviser or related person serves as qualified custodian of The SEC advised that they would not seek enforcement action against RIAs who do not obtain a surprise examination as long as the RIA follow the below guidelines: Second, the Custody Rule requires the accounting firm performing either a surprise examination or financial statement audit to meet the auditor independence standards set forth in Regulation S-X. An accountant needs to address both the Custody Rule and Recordkeeping Rule requirements in its surprise examination. The rule amendments will be effective 60 days after their publication in the Federal Register. The amendments, among other things, require certain registered invest-ment advisers that have custody of client funds or securities to undergo an annual surprise examination Surprise Examination: Advisers required to obtain a surprise examination must enter into a written agreement with an independent public accountant that provides that the first examination will take place by December 31, 2010, or for advisers that become subject to the Custody Rule after the effective date, within six months of becoming subject to the requirement. The letter also clarified that a standing letter of To obtain information about the requirements, costs, and other issues associated with the SEC custody rule, we interviewed, among others, federal and state regulators and representatives from various industry and other associations. (That is, the amended custody rule contains an exception from the surprise examination requirement for advisers to pooled investment vehicles that are annually audited by a PCAOB-registered … The Custody Rule for Registered Investment Advisors The contents of this presentation have been prepared for educational and information purposes ... • Have an independent public accountant perform an annual “surprise” examination verifying the funds and securities under the advisor’s “custody” pursuant to a written agreement. We can assist you with satisfying this surprise examination requirement. ... periodic account statements; and (4) establish an arrangement with an independent public accountant to perform annual surprise audits. Advisers subject to the surprise examination must enter into a written agreement The reports currently presented on this surprise examination of client accounts held at a qualified custodian, as other-wise required by the custody rule. Feb. 18, 2021 A Refresher on Custody and What to Expect on Surprise Custody Exams; Oct. 1, 2020 SEC Continues to Emphasize Strict Compliance With Custody Rule; Jan. 16, 2020 The Custody Rule: Robert Plaze Discusses Compliance Challenges, Common Issues and Tips (Part Two of Two) Dec. 19, 2019 A sample of accounts subject to the surprise examination will be selected for further testing. These violations were observed in the course of the SEC’s National Examination Program (the “NEP”) of registered investment advisers. In some cases, advisers are … Registered investment advisers (RIAs) that maintain custody of customer assets, and who are registered with the Securities and Exchange Commission (SEC), are subject to various regulations intended to protect their clients. The surprise exam covers several specific aspects of the custody and recordkeeping rules. In December 2009, the SEC approved the custody rule of the Investment Advisers Act of 1940, requiring that advisors deemed to have custody of client funds or securities must undergo an annual surprise examination. (discussing compliance with the Custody Rule with respect to SPVs). The Recordkeeping Rule requires advisers with custody of client funds to maintain certain books and records of client transactions and positions. delivery and surprise exam requirements While the overwhelming majority of private fund advisers rely on the audit exception to address custody issues, IAs have the option to comply with the notice, account statement and surprise exam requirements of the custody rule. For an RIA newly subject to the custody rule, a surprise independent verification or custody exam can seem intimidating. In general, The Custody Rule (Rule 206 (4)-2) requires that advisers custody funds and securities with a qualified custodian who sends statements to the adviser’s clients on a quarterly basis at a minimum. But if “logistical … General Rule: Sole trustees deemed to have "custody" are subject to the surprise exam requirement. Q:An investment adviser that currently sends account statements to its clients in lieu of those from a qualified custodian now must arrange for the account statements to be delivered directly by a qualified custodian. Recent SEC staff no-action letter allows certain sub-advisers to avoid the burdensome surprise examination requirement under the Custody Rule. The surprise examination must be completed within six months of the adviser becoming subject to the Custody Rule. The SEC adopted December 16 its custody rules that would require advisors who have custody of clients’ assets to submit to annual surprise examinations by outside auditors. The New Custody Rule will be effective on April 1, 2014. For an RIA newly subject to the custody rule, a surprise independent verification or custody exam can seem intimidating. Rule 206 (4)-2 (a) (6) establishes additional requirements for an investment that itself, or its related person, maintains … B. B. In addition, the audited financial statements are required Surprise examinations Compliance services for investment advisers BerryDunn’s Financial Services Group works closely with clients to ensure compliance with the rules and regulations that inform SEC special reporting, including Rule 206(4)-2 of the Investment Advisers Act of 1940 (the Custody Rule). Under the Custody Rule, an annual surprise examination by an independent public accountant is required for any adviser who has custody of client assets, except for those advisers who meet certain exceptions. Second, the Custody Rule requires the accounting firm performing either a surprise examination or financial statement audit to meet the auditor independence standards set forth in Regulation S-X. [3] Advisers subject to the annual surprise examination must enter into a written agreement An Annual RIA Surprise Audit Exam Is Required. The Custody Rule includes an independent verification or surprise custody examination. Rule 206-4(2) Custody Webinar Form ADV Disclosures • Report number of accounts and AUM for which “custody” exists • Month in which the last surprise security examination occurred • Identity of related person custodians and whether “operationally independent” • Identity of accountant performing surprise examination, control The California Commissioner of Business Oversight (“Commissioner”) recently amended California’s custody rule 10 C.C.R. Registered Adviser Custody Rules SEC Adopts Final Rules and Issues Guidance to Safeguard the Custody of Client Assets by Investment Advisers SUMMARY The SEC has adopted and published amendments to Rule 206(4)-2 under the Investment Advisers Act of 1940 which, once effective, will require: • Annual Surprise Examination. 13 Additional exceptions to the surprise exam requirement are available where an adviser has custody solely because: (i) it has the authority to withdraw fees from a client’s account or (ii) a related person has custody, provided that such adviser and such related person The Amended Custody Rule Subject to notable exceptions, the Amended Custody Rule requires registered advisers deemed to have custody of clients assets to undergo an annual surprise examination by an independent accountant, which The surprise examination will at a minimum include: Examination of the books and records as they relate to the RIA’s custody; Confirmation with the qualified custodian(s) & client(s)->Confirmation with the qualified custodian(s): client funds and securities as of the date of the examination, and This guidance outlines a set of conditions that, when followed, allows RIAs to avoid the annual surprise examination requirement of the rule (aka ‘no-action relief’). surprise examination must enter into a written agreement with an independent public accountant that provides that the first examination will take place by December 31, 2010 or, for advisers that become subject to the Custody Rule after March 12, 2010, within six months of becoming subject to the surprise exam requirement. - 3 - Annual Surprise Examination of Client Assets The amended Custody Rule requires a registered adviser with custody of client assets or securities4 to undergo a surprise examination of client assets by an independent public accountant and have a reasonable basis for believing the qualified custodian is sending quarterly surprise examination requirement in accordance with the Custody Rule. We have significant experience counseling investment advisors on the application of the enhanced custody rule and, when necessary, performing the SEC-mandated surprise examination. The final amendments to Rule 206(4)-2 require that a registered investment adviser with custody of client assets must engage an independent public accountant 2 to conduct an annual surprise examination of client assets. Advisers must notify their clients that they are doing so, identify the custodian, and ensure that the custodian is … Annual Surprise Examination of Client Assets With limited exceptions, the Amended Custody Rule will require Advisers to undergo an annual surprise examination of client assets for which the Adviser has custody. Section 260.237 (the “New Custody Rule”). The following is a summary of the key changes to the Custody Rule and their effect on different types of advisers. One of the responses contained a link to this page and referred to an illustrative surprise examination report to reflect the reporting specified in the guidance for accountants. As the end of the year rapidly approaches, it is a good time for investment advisers ("Advisers") to refresh their memories and evaluate their practices with relation to Rule 206 (4)-2 of the Investment Advisers Act of 1940, which is referred to as the "Custody Rule." Earlier this year, we outlined a number of common scenarios which an registered investment adviser (RIA) firm may be deemed to have custody of client funds or securities.One of the key SEC investment adviser compliance requirements for a RIA firm deemed to have custody is the independent surprise examination requirement performed by an accounting firm which is … Requirement for an independent verification (surprise exam) on an annual basis. An accountant needs to address both the Custody Rule and Recordkeeping Rule requirements in its surprise examination. Investment advisers that have custody of client assets are subject to an annual surprise examination of those assets by an independent public accountant under the amended custody rule, unless the adviser has custody solely because of its authority to deduct advisory fees from client accounts or it is an adviser to a pooled investment vehicle that is subject to an annual … General Rule: Sole trustees deemed to have "custody" are subject to the surprise exam requirement. That said, such an adviser is also excepted from the annual surprise exam if the related person is “operationally independent.” 7 Like the advisory fee deduction exception, all the other requirements of the Custody Rule besides the annual surprise exam requirement continue to apply. The SEC also published a companion release to the Custody Rule amendments (Rel. The Custody Rule generally requires that any funds or securities of a client of a registered investment adviser be held by a “qualified custodian” (generally a bank or broker-dealer). Custody Rule, which does not require an adviser to obtain an annual surprise examination with respect to client accounts for which the adviser has a reasonable belief that a qualified custodian provides account statements directly to clients; or in the case In order to assess an advisor’s compliance with the Custody Rule, the accountant first needs to obtain, from the advisor, a list of open and closed accounts that are subject to surprise examination due to an advisor’s custody of client funds. The latest SEC FAQ related to custody permits advisers to have their accountants delay their surprise exam. Amendments to Rule 206(4)-2 of the Investment Advisers Act of 1940, the Custody Rule, adopted in 2010, were designed to provide expanded safeguards for clients of investment advisers. In fact, many advisers exert significant effort to ensure they are not subject to the custody rule. Amendments to the custody requirements of Rule 206(4)-2 under the Investment Advisers Act of 1940 and related forms (Custody Rule). Independent public accountants must be registered with the Public Company Accounting Oversight Board (PCAOB). On… Our experienced financial services team helps determine how the SEC’s interpretation of the enhanced custody rule applies to your clients' accounts. Consequently, advisers that maintain custody of privately offered securities on behalf of their clients are subject to the surprise examination requirement under the Amended Rule. If an RIA has custody of client assets, the Custody Rule requires an annual RIA surprise audit with an independent public accountant to examine those assets on a surprise basis every year. - 3 - Annual Surprise Examination of Client Assets The amended Custody Rule requires a registered adviser with custody of client assets or securities4 to undergo a surprise examination of client assets by an independent public accountant and have a reasonable basis for believing the qualified custodian is sending quarterly For advisers … That said, such an adviser is also excepted from the annual surprise exam if the related person is “operationally independent.” 7 Like the advisory fee deduction exception, all the other requirements of the Custody Rule besides the annual surprise exam requirement continue to apply. ... and surprise examination requirements of the Custody Rule. Recent SEC staff no-action letter allows certain sub-advisers to avoid the burdensome surprise examination requirement under the Custody Rule. The rule also provides an enhanced protection when a RIA has self-custody 3 or custody by a related person to comply with the 4 protections noted above, which includes: (1) the accountant engaged to perform a surprise examination must be registered with, and CCOs should note that OCIE reported numerous weaknesses with the surprise exam, A sub-adviser to a private fund can avoid custody by not serving “as a general partner or is not otherwise granted authority to access fund assets.” The guide cites a “quirk” in the custody rule that could require both the adviser and its affiliated sub-adviser “to obtain a surprise examination of the same assets.” In fact, many advisers exert significant effort to ensure they are not subject to the custody rule. For registered investment advisers that become subject to the Amended Custody Rule after its effectiveness, the firm must engage an accounting firm to perform the examination within six (6) months of becoming subject to the Annual Surprise Audit requirement or of receiving the internal control report if a related qualified custodian is used. The Custody Rule applies to private fund advisers who are registered as RIAs at the federal level and specifies a number of requirements that apply when a private fund adviser has custody of advisory client funds or securities. Provision of non-audit services by the auditor to either the adviser or one of its affiliates can jeopardize the auditor’s independence and cause the adviser to fail to meet the … Amendments to Rule 206(4)-2 of the Investment Advisers Act of 1940, the Custody Rule, adopted in 2010, were designed to provide expanded safeguards for clients of investment advisers.

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