SEC Division of Investment Management staff letter: Investment Adviser Association

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Investment Advisers Act of 1940 – Section 206(4) and Rule 206(4)-2

April 25, 2016

Response of the Division of Investment Management IM Ref. No.: 20164261627

Robert C. Grohowski General Counsel Investment Adviser Association 1050 17th Street, NW Suite 725 Washington, DC 20036-5514

Dear Mr. Grohowski:

We request that you share with your members the following letter concerning the independent verification required by Rule 206(4)-2 under the Investment Advisers Act of 1940 (“Advisers Act”). As you know, a registered investment adviser with custody of client funds or securities is required by Rule 206(4)-2 to take a number of steps designed to safeguard those client assets. [1] One such step is that an adviser that has custody of client assets generally must undergo an annual surprise examination by an independent public accountant to verify the client funds and securities. [2] In addition, the United States Securities and Exchange Commission (“Commission”) recognizes that affiliated custodial relationships present higher risks to advisory clients than where client funds or securities are maintained with an independent custodian. [3] In this regard, where an investment adviser, or its related person, maintains client funds or securities, it must obtain or receive a written internal control report from an independent public accountant that demonstrates that it, or its related person, has established appropriate custodial controls. [4]