On April 25, 2016, the Staff of the Division of Investment Management of the Securities and Exchange Commission issued a no-action letter that provides that it would not recommend enforcement action to the Commission under Section 206(4) of, and Rule 206(4)-2 under, the Investment Advisers Act of 1940 if an investment adviser does not obtain a surprise examination by an independent public accountant (as is generally required) where it acts as a sub-adviser in an investment advisory program for which a “related person” “qualified custodian” is the primary adviser (or an affiliate of the primary adviser), and the primary adviser is responsible for complying with Rule 206(4)-2. A “related person” of another generally is a person who is directly or indirectly controlling or controlled by the other person or under common control with such person. A “qualified custodian” is a bank, a registered broker-dealer, a registered futures commission merchant and certain foreign financial institutions.”
The Staff’s position was based, in particular, on the following:
-
the sole basis for the sub-adviser having custody is its affiliation with the qualified custodian and the primary adviser;
-
the primary adviser will comply with Rule 206(4)-2 (including by having client funds and securities in the investment advisory program verified by a surprise examination conducted by an independent public accountant registered with the Public Company Accounting Oversight Board (“PCAOB”) pursuant to an agreement entered into by the primary adviser);
-
the sub-adviser does not: (i) hold client funds or securities itself; (ii) have authority to obtain possession of clients’ funds or securities; or (iii) have authority to deduct fees from clients’ accounts; and
-
the sub-adviser will continue to be required to obtain from the primary adviser or qualified custodian annually a written internal control report prepared by an independent public accountant registered with and subject to regular inspection by the PCAOB as required by Rule 206(4)-2(a)(6).
