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In simpler terms, the custody rule requires that all investment advisers and similar entities keep client securities and funds safe while those assets are in the advisers possession. An investment advisor, trader or broker must keep their clients assets separate and apart from their own.
Generally, the Final Rule would have (1) restricted certain activities by private fund advisers that the SEC believes involve conflicts of interest and compensation schemes that are contrary to the public interest; and (2) imposed a host of new disclosure requirements on advisers to private funds, similar in certain
On December 30, 2009, the SEC released amendments to Rule 206(4)-2, often referred to as the custody rule, under the Advisers Act. In conjunction with the adoption of the final rule, the SEC also released separate interpretive guidance for independent public accountants. SEC Adopts Final Amendments to the Custody Rule under the Advisers Act Ropes Gray LLP insights alerts 2010/01 Ropes Gray LLP insights alerts 2010/01
The investment adviser has custody if a related person holds, directly or indirectly, client funds or securities, or has any authority to obtain possession of them, in connection with advisory services the investment adviser provides to clients. 1 Rule 102(e)(1)-1 Custody of Client Funds or Securities - NASAA NASAA wp-content uploads 2011/07 NASAA wp-content uploads 2011/07
The custody rule requires an adviser that has custody of client assets to maintain those assets with a qualified custodian such as a bank, broker-dealer, or futures commission merchant, and to have a reasonable basis for believing the custodian sends quarterly account statements directly to the clients.

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A private-fund sponsor relying on the Custody Rule audit exemption is required to ensure that the audited financial statements are delivered within 120 days of the end of the funds fiscal year, with an allowance for certain longer time periods for funds of funds.
Footnote 139 of the Adopting Release explains, however, that the role of the supervised person as trustee will not be imputed to the advisory firm if the supervised person has been appointed as trustee as a result of a family or personal relationship with the grantor or beneficiary and not as a result of employment Staff Responses to Questions About the Custody Rule - SEC.gov SEC.gov about topical-reference-guide SEC.gov about topical-reference-guide

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