The SEC issued a no-action letter last month regarding the Custody Rule, Rule 206(4)-2 of the Investment Advisers Act of 1940 (“Advisers Act”). The no-action letter to 16th Amendment Advisors LLC is important for certain private fund advisers as it provides relief from key requirements of the Rule.
Specifically, the relief is intended for those private fund advisers that manage assets mainly for the benefit of their own control persons and closely related family members, but do not qualify under the family office exemption and are therefore subject to the Custody Rule requirements.
The no-action letter is significant in that it provides relief from:
- Rule 206(4)-2(a)(2), notice to clients of the name and address of the qualified custodian holding client assets.
- Rule 206(4)-2(a)(3), the requirement to have account statements sent quarterly to clients.
- Rule 206(4)-2(a)(4), the requirement to have an annual independent verification of client funds and securities (surprise audit).
- Rule 206(4)-2(b)(4), the “audit rule” provision that requires a fund to send audited financial statements to all investors within 120 days of its fiscal year-end.
A private fund adviser may only take advantage of this relief if it can prove that ALL fund investors are:
- Investors that (a) have unlimited access to fund, adviser, and general partner information via statutory or contractual access or a combination of the two; (b) are listed as control persons in Schedule A to Form ADV due to their role as an officer or director or similar status; and (c) investors have a material ownership interest in the adviser.
- Other than the above, the only other investors may be advisory principals’ spouses, minor children or investment vehicles created for the individual or joint benefit of those principals or their spouses or minor children (trusts).
This is welcome relief for registered advisers of closely held private funds.