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SEC Adopts Amendments to Custody Rule

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WASHINGTON (–The Securities and Exchange Commission adopted amendments to rule 206(4)-2 under the Investment Advisers Act, the rule that mandates the separation and identification of client funds and securities left in the custody of an adviser under the Investment Advisers Act, Sept. 11.

Because, as Paul Roye said a year ago, SEC inspectors have found advisers keeping securities certificates in their office files, where they might easily have been lost or destroyed the new rule requires advisers to maintain client funds and securities with “qualified custodians,” banks and savings associations, broker-dealers, futures commission merchants and certain foreign financial institutions.

The amended rule generally requires that an adviser’s clients receive their quarterly account statements directly from the qualified custodian, not solely from the adviser.

“Direct delivery will assure integrity of the report,” the SEC said in a statement, “and is designed to permit clients to determine whether there has been any improper trading in the account.”

The new rule also subjects custodians to a surprise examination, or “security count.”

But, as explained in a regulatory bulletin issued Oct. 2 by Deloitte & Touche Investment Management News, limited partnerships and other types of pooled investment vehicles will be exempt from the account statement requirements and the surprise security count on two conditions: transactions and assets are subject to an annual audit, and audited financial statements, prepared in accordance with generally accepted accounting principles, are distributed to all limited partners, members or other beneficial owners within 120 days of the end of the pool’s fiscal year.

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