SEC Division of Investment Management staff letter: Robert Van Grover Esq., Seward & Kissel LLP

Dec. 11, 2019

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

Robert Van Grover, Esq., Seward & Kissel LLP

December 11, 2019

Investment Adviser Regulation Office
Division of Investment Management

On four prior occasions, the staff of the Division of Investment Management (the “staff” or “we”) provided you with no-action relief concerning the performance of certain engagements under Investment Advisers Act rule 206(4)-2 (the “Custody Rule”) by auditors engaged to audit the financial statements of a broker or a dealer.[1] Absent adoption by the Public Company Accounting Oversight Board (“PCAOB”) of a permanent program for the inspection of broker and dealer auditors, the no-action position taken in the most recent no-action letter expires on December 31, 2019. This letter extends that no-action relief until the date that a PCAOB-adopted permanent program, having been approved by the Commission, takes effect.[2]

The Custody Rule requires auditors performing certain engagements (each, an “Engagement”), for purposes of an investment adviser's compliance thereunder, to be registered with, and subject to regular inspection by, the PCAOB as of the commencement of the professional engagement period and as of each calendar year-end.[3] In the October 4, 2016 letter, we stated that, in light of the PCAOB’s Temporary Rule providing for its inspection of auditors related to audits of brokers or dealers, we would not recommend enforcement action to the Commission under Section 206(4) of the Advisers Act and rule 206(4)-2 thereunder against an investment adviser who, for purposes of compliance with the Custody Rule, engages an auditor to (1) perform a surprise examination of an investment adviser who maintains, or who has custody because a related person call or redemption maintains, client funds or securities as qualified custodian in connection with advisory services provided to clients, (2) prepare an internal control report, or (3) audit the financial statements of a pooled investment vehicle in connection with the annual audit provision,[4] as long as such auditor was registered with the PCAOB and was engaged to audit the financial statements of a broker or a dealer as of the commencement of the professional engagement period of the respective Engagement and as of each calendar-year end.

In light of the PCAOB’s on-going Temporary Rule and its continued work on presenting a rule proposal for a permanent inspection program, we would not recommend enforcement action as described above and in the October 4, 2016 letter until the date a PCAOB-adopted permanent program for the inspection of broker and dealer auditors, having been approved by the Commission, takes effect.

Benjamin A. Tecmire
Senior Counsel

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[1] See incoming letters and staff responses dated October 12, 2010 (available at http://www.sec.gov/divisions/investment/noaction/2010/sewardkissel101210.pdf), July 21, 2011 (available at http://www.sec.gov/divisions/investment/noaction/2011/sewardkissel072111.pdf), November 5, 2013 (available at https://www.sec.gov/divisions/investment/noaction/2013/vangrover-seward-kissel110513.htm), and October 4, 2016 (available at https://www.sec.gov/divisions/investment/noaction/2016/vangrover-seward-kissel-100416-206-4.htm).

[2] The PCAOB adopted on June 14, 2011 a temporary rule (the “Temporary Rule”) that established an interim program of inspection related to audits of brokers and dealers. This response will also cease to apply if the Temporary Rule is withdrawn or disapproved.

[3] See rule 206(4)-2(a)(6)(i) (surprise examination of an adviser who maintains, or who has custody because a related person maintains, client funds or securities as qualified custodian in connection with advisory services provided to clients); rule 206(4)-2(a)(6)(ii)(C) (internal control report); and rule 206(4)-2(b)(4)(ii) (pooled investment vehicle audit to comply with the annual audit provision). Auditors performing surprise examinations of advisers who solely use independent qualified custodians are not required to be registered with, and subject to regular inspection by, the PCAOB.

[4] Rule 206(4)-2(b)(4).

Last Reviewed or Updated: Oct. 6, 2022

Resources

• Incoming Letter

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ROBERT B. VAN GROVER
PARTNER
(212) 574-1205 vangrover@sewkis.com

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October 25, 2019

Investment Advisers Act/Rule 206(4)-2

Jennifer Songer
Branch Chief, Investment Adviser Regulation Office U.S. Securities and Exchange Commission Division of Investment Management 100 F Street NE Washington, DC 20549 E-mail: songerj@SEC.GOV

Re: Investment Advisers Act of 1940, as amended, Rule 206(4)-2

Dear Ms. Songer,

In a letter dated October 12, 2010, the staff of the Division of Investment Management (the "Staff") acknowledged that Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law on July 21, 2010, provided the Public Company Accounting Oversight Board (the "PCAOB") with authority to develop rules to establish a regular inspection program for auditors of brokers and dealers. Noting that auditors to brokers and dealers registered with the PCAOB will not be subject to regular inspection until the PCAOB rules referenced above are adopted and take effect, the Staff indicated that it would not recommend enforcement action to the Securities and Exchange Commission (the "Commission") under Section 206(4) of the Advisers Act and rule 206(4)-2 thereunder (the "Custody Rule") against an investment adviser that engages an auditor, which is not subject to regular inspection by the PCAOB but which audits the financial statements of a broker or a dealer, to audit the financial statements of a pooled investment vehicle for purposes of complying with rule 206(4)2(b)(4) (the "Annual Audit Provision"), subject to the conditions outlined in the letter.

In a letter dated July 21, 2011, the Staff noted that in light of the rule adopted by the PCAOB on June 14, 2011 establishing an interim program of inspection related to auditors of brokers and dealers, it would not recommend enforcement action to the Custody Rule against an investment adviser who, for purposes of compliance with the Custody Rule, engages an auditor to (1) perform a surprise examination of an investment adviser who maintains, or who has custody because a related person maintains, client funds or securities as qualified custodian

in connection with advisory services provided to clients, (2) prepare an internal control report, or (3) audit the financial statements of a pooled investment vehicle in connection with the Annual Audit Provision, as long as such auditor was registered with the PCAOB and was engaged to audit the financial statements of a broker or a dealer as of the commencement of the professional engagement period of the relevant engagement and as of each calendar-year end.

The Staff reiterated its no-action position in letters dated November 5, 2013 and October 4, 2016. In its letter dated October 4, 2016, the Staff stated that, absent adoption by the PCAOB of a permanent program for the inspection of broker and dealer auditors, its no-action position will expire on December 31, 2019.

As the PCAOB has not yet adopted a permanent program for the inspection of broker and dealer auditors, we request that the Staff extend this no-action relief until the date a PCAOB-adopted permanent program for the inspection of broker and dealer auditors, having been approved by the Commission, takes effect.

If you have any questions, please do not hesitate to contact me at (212) 574-1205 or vangrover@sewkis.com. We appreciate your attention to this issue.

Sincerely,

Robert Van Grover, Esq.

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