SEC Division of Investment Management staff letter: Seward & Kissell

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

DIVISION OF October 12,2010 INVESTMENT MANAGEMENT Robert Van Grover, Esq.
Seward & Kissell LLP
One Battery Park Plaza
New York, NY 10004 US
Re: Request for no-action relief under the Investment Advisers Act of 1940

Section 206(4) and Rule 206(4)-2

In your letter dated October 1, 2010, you asked the staff ofthe Division ofInvestment Management (the "staff') to provide guidance regarding compliance by certain investment advisers with rule 206(4)-2 (the "Custody Rule") under the Investment Advisers Act of 1940, as amended (the "Advisers Act"). You represent that many investment advisers to one or more limited partnerships (or limited liability companies or other types of pooled investment vehicle ("private funds")) have custody of such private funds' assets as defined in the Custody Rule. Further, you represent that most of such investment advisers to private funds obtain annual audits ofthe private funds for purposes of complying with rule 206(4)-2(b)(4) (the "Annual Audit Provision"). Among other conditions, rule 206(4)-2(b)(4)(ii) requires that the annual audit ofthe private fund be conducted by "an independent public accountant that is registered with, and subject to regular inspection as ofthe commencement ofthe professional engagement period, and as of each calendar year-end, by, the Public Company Accounting Oversight Board ("PCAOB") in accordance with its rules." Only auditors to public companies are currently subject to regular inspection by the PCAOB. However, Title IX ofthe Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), signed into law on July 21,2010, provides the PCAOB with authority to develop rules to establish a regular inspection program for auditors of brokers and dealers as well. I You indicate that several of your investment adviser clients that manage private funds have engaged auditors that are auditors to brokers or dealers but not to public companies. These auditors are registered with the PCAOB but will not be subject to regular inspection until the PCAOB rules referenced above are adopted and take effect. As a result, such auditors' audits of private funds would not technically comply with the Annual Audit Provision ofthe Custody Rule. Furthermore, even after such PCAOB rules are adopted and take effect, such audit firms may not be able to represent that they were subject to regular inspection as ofthe commencement ofthe professional engagement period, depending upon when the rules became effective and when the engagement period commenced. You represent that this aspect ofthe Custody Rule may be disruptive to certain advisers that would be required to replace such auditors until the auditors become subject to regular inspection by the PCAOB, as contemplated by the Act, even ifthe advisers contemplate re￾See Dodd-Frank Act Section 982.