SEC Votes to Adopt New Self-Custody Rules
The SEC has voted to impose additional requirements on investment advisers that maintain custody of client assets but excluded advisers that have custody only because they have the ability to deduct fees from client accounts. The new rules will require advisers that maintain custody of client assets to undergo an annual surprise exam by an independent auditor to verify assets and an annual SAS 70 of custody controls. Also, private fund auditors must be PCAOB registered to allow the fund sponsor to comply with the custody rule. The SEC excluded advisers that only have custody by virtue of their ability to deduct fees but will mandate specific controls and procedures.
OUR TAKE: We do not think this revised custody rule will have a significant impact on most investment advisers because most use an independent custodian. Requiring the surprise audit and the SAS 70 makes it very expensive to engage in self-custody.