Private Fund Sponsors Need Not Retain Qualified Custodian for Stock Certificates
The staff of the Division of Investment Management has issued a guidance update that allows private fund sponsors to avoid retaining a custodian to hold stock certificates evidencing interests in underlying private issuers. The custody rule, as written, would require a private fund sponsor to retain a qualified custodian to hold stock certificates in underlying private issuers even if the fund was audited and investors received account statements. No such requirement exists for uncertificated interests in private offerings. The guidance eliminates this qualified custodian requirement so long as the fund is audited, ownership is recorded on the books of the issuer, and the certificate is safeguarded and can be replaced.
OUR TAKE: This is very helpful for private equity fund sponsors who often hold interests in underlying private issuers. The mere fact that the underlying investment issues a stock certificate should not require the hiring of a third party custodian.