The SEC Custody Rule, IA-2968—Custody of Funds or Securities of Clients by Investment Advisers
, which became effective on March 12, 2010, revised an existing surprise examination requirement for SEC-registered investment advisers. The amended rule exempts advisers to certain "pooled funds" from its requirements if certain conditions are met, one of which is that the fund receives annual audits conducted by a PCAOB-registered and inspected independent public accountant. Over the past few months, the AICPA has received inquiries from members who audit pooled funds but do not meet the rule’s requirements because they are either not registered with the PCAOB, or are registered but not subject to regular inspection because they do not audit issuers (i.e., "inspection gap").
The AICPA has discussed this "inspection gap" issue with the SEC and while the SEC acknowledges that a definite "inspection gap" exists, its analysis indicates that the vast majority of pooled funds already receive audits by PCAOB-inspected and registered firms such that the overall impact of this gap is not extensive.
If your firm is impacted by this issue, the SEC wants to hear from you directly. The AICPA has raised the concern and been advised that the SEC will carefully evaluate this feedback. Please review the AICPA's formal proposal
and follow-up letter
to the SEC which would, if approved, remedy this inspection gap. Input should be provided by emailing IMOCA@sec.gov
or calling the Office of the Chief Accountant, Division of Investment Management, at 202.551.6918. To help the AICPA monitor this issue, please share with us your comments to the SEC by emailing a copy of your comments to firstname.lastname@example.org
On October 12, 2010, the SEC issued a No-Action Letter
applicable to any investment adviser whose auditor meets specific criteria. In recognition of the fact that this relief is very limited, the AICPA submitted its own request for no-action relief
on December 9, 2010. In a letter from the SEC dated December 23, 2010
, the AICPA's request for no-action relief was denied. The AICPA intends to pursue resolution for our members who are impacted by this issue.
Additional guidance issued by the SEC
SEC Approves Custody Rule (December 2009)
The Securities and Exchange Commission (SEC) approved the Custody Rule of the Investment Advisers Act of 1940 on December 16th. Overall, the AICPA was in support of the proposed Rule as a means to strengthen investment protections in the U.S. securities markets. AICPA made specific recommendations to the proposed rule amendments, including that the focus of the applicability of the surprise examination requirement be on those advisers that pose the greatest degree of risk. The final rule exempts investment advisers who are deemed to have custody solely because they deduct advisory fees. Read
a summary and analysis of the final SEC custody rule.
AICPA Comments on the SEC’s Custody Rule of the Advisers Act of 1940 Proposed Amendments (July 2009)
On July 28, 2009, the AICPA submitted comments to the SEC’s proposed amendments to the Custody Rule of the Advisers Act of 1940. Topics addressed included the scope of advisers
subject to both the surprise examination and internal controls examination, scope, guidance and applicable standards
specific to each of these examinations, auditor qualifications
, as well as independence
and cost considerations
the AICPA comments to the proposed custody rule.