SEC Issues Guidance Update Regarding IAA Custody Rule (with Lofchie Comment)

The SEC has issued a guidance update on whether Rule 206(4)-2 ("Custody of Funds or Securities of Clients by Investment Advisers") of the IAA requires advisers of audited pooled investment vehicles to maintain certain instruments with a qualified custodian. Namely, these instruments are non-transferable stock certificates or "certificated" LLC interests that were obtained in a private placement ("private stock certificates"). The guidance states that the private stock need not be held with a custodian if it meets the following five criteria:

• The client is a pooled investment vehicle that is subject to audits in accordance with Rule 206(4)-2(b)(4);
• The private stock certificate cannot be transferred without prior consent of the issuer;
• Ownership of the security is recorded on the books of the issuer;
• The private stock contains a legend restricting transfer; and
• The private stock certificate is appropriately safeguarded and can be replaced if destroyed.

Lofchie Comment: The SEC staff should also address custody arrangements as to other types of financial interests; e.g., OTC derivatives contracts.

See: SEC Guidance Update No. 2013-04.
See generally:The Ownership and Custody Chapter of the Hedge Fund Guide.