Staff Updates Responses to Questions About the Custody Rule

The SEC’s Division of Investment Management has updated responses to questions about the custody rule under the Investment Advisers Act. The new and modified postings are dated September 9, 2010. The staff modified its response relating to whether an adviser has custody if it has the authority to instruct a qualified custodian that maintains a client’s account to remit the funds or securities from the account to the same client at his or her address of record.

The staff does not interpret the authority to instruct the qualified custodian maintaining a client’s account to remit the funds or securities from the account to the same client at his or her address of record as having custody if the client has granted the authority to the adviser in writing and a copy of the authorization is provided to the qualified custodian, the adviser has no authority to open an account on behalf of the client, and the adviser has no authority to designate or change the client’s address of record with the qualified custodian.

If an adviser has a reasonable belief that the qualified custodian, upon receiving the request for a change of address, sends a notice of the change to the client at the client’s old address of record, the adviser may change the client’s address of record with the qualified custodian and still rely on the response above.

The staff advised that there is an example of a report that may be issued by an independent public accountant performing a surprise examination of an adviser. The surprise examination is a compliance examination to be conducted in accordance with the AICPA’s attestation standards. The AICPA has issued an illustrative surprise examination report to reflect the reporting specified in the SEC’s guidance for accountants (Rel. No. IA-2969). The report is available on the AICPA’s Web site.

In the guidance for accountants, the SEC noted that two types of reports issued under the AICPA’s professional standards would be sufficient to satisfy the requirements of the internal control report (Type II SAS 70 or AT 601 compliance attestation). The staff said there are other report formats that can be used to satisfy the custody rule. The AICPA recently developed a report under AT 101, Attest Engagements, that would be acceptable. An illustrative report is available on the AICPA’s Web site.