The recent changes by the U.S. Securities and Exchange Commission (“SEC”) to Rule 206(4)-2 under the Investment Advisers Act of 1940 include an important development for investment advisers that operate so called pooled investment vehicles. Pooled investment vehicle is an SEC term and includes private investments such as limited liability companies and limited partnerships not registered as investment companies. For example, unregistered hedge funds fall under this category.
Investment advisers that operate pooled investment vehicles are required to: use a qualified custodian (e.g. a registered broker/dealer or registered bank) to hold assets of the pooled investment vehicle; form a reasonable belief that the qualified custodian delivers account statements to all investors; and comply with the annual surprise verification examination. Many pooled investment vehicles own or hold assets, such as real estate, not held at a qualified custodian. Therefore, complying with the qualified custodian, account statements and surprise verification examination requirements will prove impossible. For this reason, the SEC has provided relief to these requirements so long as the pooled investment vehicle is subject to an annual financial statement audit performed by an independent accounting firm; the audit is performed within 120 days after the pooled investment vehicle’s fiscal year-end; and the results of the audit are delivered to all investors of the pooled investment vehicle.
Many pooled investment vehicles are already subject to annual financial statement audits and deliver the results to investors so the new rule will have little impact in this regard. However, the new rule requires pooled investment vehicles to hire and retain independent accounting firms that are registered with and inspected by the Public Company Accounting Oversight Board (PCAOB). Pooled investment vehicles that are not subject to an annual financial statement audit performed by a PCAOB registered and inspected accounting firm and/or do not deliver the results of such an audit to investors, must ensure assets are held with a qualified custodian, all investors receive statements directly from the qualified custodian(s), and ensure compliance with the annual surprise examination requirements.
This Thursday, March 25, we will be hosting our second webinar on the new SEC custody rule. The webinar will begin at 12:00 p.m. Central and will focus specifically on how the rule applies to pooled invest vehicles and investment advisers operating a qualified custodian and/or introducing broker-dealer. We discuss the annual audit requirements and many other pressing issues for pooled investment vehicles. Click here to enroll.