Custody Rule Gains Attention from SEC, Cayman Islands Government | Schwab - Millennium Trust Company

Custody Rule Gains Attention from SEC, Cayman Islands Government

March 25, 2020
By Jeremy Christensen
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Even though the SEC’s Custody Rule (Rule 206(4)-2 under the Investment Advisers Act of 1940) has been around for a long time, we frequently receive questions about the rule.

As a recap, the Custody Rule requires, among other things, that registered investment advisers who have custody of client funds or securities must maintain these assets with a qualified custodian.

The rule’s central purpose is to provide protection for investors’ assets against the possibility of loss, misuse or misappropriation. It seems pretty straightforward, but, like any rule, the Custody Rule is subject to interpretation. And rules and regulations change frequently, too. I’ve read a couple of interesting articles recently that share new perspective on the rule.

The Cayman Islands Government has recently passed new legislation that changes its custody rules for private funds, and now requires that private funds register with, and are regulated by, the Cayman Islands Monetary Authority (CIMA). The Private Funds Law 2020, requires, among other things, that all private funds “appoint an administrator, a custodian, or another independent third party for the purposes of cash monitoring,” according to an article published by CPA firm CohnReznick. This is a significant change and requires that any new fund created in the Cayman Islands must appoint a custodian, and any existing Cayman Island-based fund has until August 7, 2020, to comply with the new legislation.

In December 2019, Proskauer law firm reported on JDSupra that the SEC’s enforcement division has been relatively active over the last year investigating and enforcing the Custody Rule. The rule states that client funds must be held with a qualified custodian, and advisers must have either an annual surprise examination or an annual audit of its financial statements by an independent public accounting firm.

The SEC appears to be focusing at least some of its enforcement efforts on the specific requirements of the rule’s audit provisions, including the timeliness of the audits, as well as the independence of the auditor. Registered advisers should be mindful so that they do not inadvertently violate the rule.

We are constantly attending conferences, speaking to clients and industry peers and keeping our ears to the ground to understand the current issues and trends in the industry. Our institutional fund custody solution can help funds comply with these rules and regulations, and our team is here to help if you have any questions about our services.

Learn more about our institutional fund custody solutions.

The material in this blog is presented for informational purposes only. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice. 

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