Client Alert

SEC Adopts Amendments to Investment Adviser Custody Rule

January 21, 2010

The Investment Management Practice


The Securities and Exchange Commission (SEC) has adopted amendments to Rule 206(4)-2 (the Custody Rule) under the Investment Advisers Act of 1940 (the Advisers Act) which governs custody arrangements for registered investment advisers. These amendments, which differ in some important respects from the proposed amendments we discussed in our Client Alert of June 2009, are intended to provide additional safeguards under the Advisers Act when a registered adviser has custody of client funds or securities. The amendments come in the aftermath of several high profile enforcement actions brought by the SEC against registered investment advisers and broker-dealers alleging misappropriation and other misuse of investor assets. While the Custody Rule currently requires advisers that have custody of client funds or securities to implement controls designed to safeguard those client assets from being lost, misused, or misappropriated or subject to the advisers bankruptcy, these recent enforcement actions have lead the SEC to conclude that additional safeguards relating to custody of clients assets are appropriate. The Custody Rule amendments do not apply to registered investment company accounts managed by an adviser.

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