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

Home | Previous Page

Investment Advisers Act of 1940 – Section 206(4) and Rule 206(4)-2 Robert Van Grover, Esq., Seward & Kissel LLP

October 4, 2016

INVESTMENT ADVISER REGULATION OFFICE DIVISION OF INVESTMENT MANAGEMENT

On three 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, 2016. This letter extends that no-action relief until December 31, 2019 or a date earlier when the Commission approves a PCAOB-adopted permanent program.

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. [2] In the November 5, 2013 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, [3] 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 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, [5] we would not recommend enforcement action as described above and in the November 5, 2013 letter through the earlier of the date the Commission approves a PCAOB-adopted permanent program for the inspection of broker and dealer auditors or December 31, 2019. [6]

Jacob D. Krawitz

Senior Counsel

[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 ), and November 5, 2013 (available at https://www.sec.gov/divisions/investment/noaction/2013/vangrover-seward-kissel110513.htm ).

[2]

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.

[3] 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.

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

[5] The PCAOB indicated that it anticipates presenting a rule proposal for a permanent inspection program in 2016. See PCAOB Annual Report on the Interim Inspection Program Related to Audits of Broker and Dealer Auditors, at iv (Aug. 18, 2016) (available at http://pcaobus.org/Inspections/Documents/BD-Interim-Inspection-Program-2016.pdf )

[6] This response will also cease to apply if the Temporary Rule is withdrawn or disapproved.

http://www.sec.gov/divisions/investment/noaction/2016vangrover-seward-kissel-100416-206-4

Home | Previous Page

Modified: 10/04/2016