SEC Proposes Amendments to Investment Adviser Custody Rule
By The Investment Management Practice
On May 14, 2009, the Securities and Exchange Commission (SEC) proposed 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 are intended to provide additional safeguards under the Advisers Act when an adviser has custody of client funds or securities. The proposals 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, and 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 rule amendments do not apply to registered investment company accounts managed by an adviser.