RIA Compliance Blog
The North American Securities Administrators Association (NASAA) today published for comment a proposed custody rule for investment advisers. The proposed rule modifies the account statement detail requirement in subsection (b)(4)(A) of a proposed rule previously issued by NASAA relating to the same subject.
Comments to the previous proposed rule focused on the requirement that an investment adviser to private funds provide detailed quarterly statements to all clients. In response to these overwhelming comments, NASAA modified subsection (b)(4)(A) to reduce the level of detail to be contained in the quarterly statements that are to be sent to investment fund participants. Under the new proposed rule, the quarterly statements need only contain the quarter-end holdings and transactions during the quarter.
The basic structure of the proposed custody rule is consistent with prior model custody rules proposed by NASAA pursuant to Uniform Securities Acts of 1956 and 2002 and adopted by many states. More specifically, it provides for a number of safekeeping requirements including, among other things, providing notice to the state’s securities administrator, employing a qualified custodian, and giving certain notices to clients. In particular, the NASAA proposed rule requires any investment adviser who sends a statement to a client to urge the client to compare the account statements received from a qualified custodian with those received from the investment adviser. Any adviser who has a reasonable basis for believing that the qualified custodian sent account statements to the investors directly need not provide a separate account statement.
The NASAA proposal contains alternative rules for limited partnerships and limited liability companies (generally to be considered as private funds). The first alternative merely requires the adviser to the private fund to send quarterly account statements to all beneficial owners of the fund or partnership. The rule requires the quarterly account statement to identify the amount of funds and each security in the account at the end of the period and set forth all transactions in the account during that period. The second alternative contains an additional gatekeeper requirement. Specifically, it requires the investment adviser, in addition to sending the account statements described above, to enter into a written agreement with an independent party who agrees to act in the best interest of the limited partners.
The final safekeeping requirement requires independent verification in the form of a surprise audit. This requirement is waived, however, with respect to investment advisers who have custody of client funds and securities solely as a consequence of their authority to make withdrawals from clients’ accounts to pay its advisory fee.
The proposed rule has a number of other requirements that should be studied closely by any state-adviser with custody. This includes any adviser to funds or any adviser who has the ability to withdraw funds to pay its fee. Anyone wishing to comment on the proposed rules should do so by May 19, 2011.
Parker MacIntyre provides legal, regulatory, and compliance advice to investment advisers with custody, including advisers to private funds.