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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

 

[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).

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