Q: If an advisor manages a client`s assets that are not funds or securities, does the amended custody rule require the advisor to hold those assets with a qualified custodian? A: No. The surprise audit must begin no later than December 31, 2010, but must not be completed until 120 days after the date chosen by the accountant conducting the surprise audit. If the adviser itself holds the client`s assets as a qualified custodian, the first unannounced audit must start no later than six months after receipt of the internal control report. For a consultant who is subject to the rule after the effective date, the surprise audit must begin within six months of becoming subject to the rule. However, as a transitional measure, the Department would not recommend enforcement action to the Commission if a consultant subject to the rule after the effective date begins its first unannounced audit within six months of the Counsellor`s coming into force or December 31, 2010. (Amended March 15, 2010) Q: If an advisor holds a client`s assets containing a swap agreement with a counterparty on deposit and deposits funds or securities as collateral in the swap on behalf of the client, does the collateral need to be held with a qualified custodian? If an RIA manages or controls a “common investment vehicle” such as a hedge fund or investment firm, a surprise audit is required, unless the vehicle claims the “audit provision”. This audit provision allows investors and assets managed in the common investment vehicle to be excluded from a surprise audit if the audited financial statements are finalized and distributed to investors within 120 days of the end of the common investment vehicle`s fiscal year (180 days for “funds of funds”). The financial statements must be prepared in accordance with generally accepted accounting principles (“GAAP”) and, if the vehicle is in liquidation, the financial statements must be distributed to all limited partners upon completion. If the vehicle is organized outside the United States (“United States”) or the principal place of business is located outside the United States, the vehicle may use non-U.S. GAAP, but the financial statements must contain substantially all information required by U.S. GAAP and a reconciliation of material differences. The audit must be conducted by a registered CPA firm and subject to PCAOB oversight to be eligible.
A: Whether an advisor holds clients` funds and securities depends on whether they directly or indirectly own the securities or are authorized to hold them. Custody is not about determining whether securities are held with a qualified custodian. Thus, a general counsel of a limited partnership or trustee of a trust would still have custody of these securities held by the partnership or trust. An advisor who does not have the legal authority to obtain possession of these securities would not normally have custody, e.g. where the client is required to enter into a subscription agreement to purchase a privately offered security and the adviser is not authorized to transfer or redeem these securities to the issuer without the client`s consent. (Published March 5, 2010.) A: The Division would not recommend that the Commission take action to enforce Rule 206(4)-2 if the audited financial statements of the top-tier pool were distributed to investors in the pool within 260 days of the end of the financial year of the tier-one pool. (Posted April 1, 2011) F. If an audit firm regularly audits the books of a consulting firm or the books of a limited partnership managed by the consulting firm, can that audit firm also be an “independent” auditor to perform the surprise audit under the custody rule? A: If the financial statements of the pooled investment vehicle are not audited and distributed to investors in accordance with paragraph (b)(4) of the rule, the exemptions provided for in this paragraph will not be available to the advisor.
Therefore, the adviser must, among other things, have reasonable grounds to believe, after a proper investigation, that the qualified depositary sends quarterly statements to each investor in the mutual fund and receives an annual surprise check of the assets of the pool. We note that the adviser must hold privately offered securities held by the pool with a qualified custodian because the exemption for privately offered securities under paragraph (b)(2) is not available in respect of the assets of an unaudited pool. (Posted May 20, 2010) A: An accountant must be registered with the PCAOB and subject to periodic inspection by the PCAOB if the accountant`s mandate is to (1) conduct an annual audit of a mutual investment vehicle in accordance with Rule 206(4)-2(b)(4); (2) the conduct of an annual surprise audit of an advisor holding client assets with a qualified depositary who is the adviser or a person related to the adviser pursuant to rule 206(4)-2(a)(4); or (3) prepare an internal control report in accordance with rule 206, paragraphs 4 to 2 (a) 6.