Over the past few weeks, the SEC’s Division of Investment Management (“the Division”) has prepared responses to various questions received about funds and advisers affected by Covid-19 and has issued a separate Covid-19 Response FAQ to address relief from existing rules.
A few of their responses relate to the custody rule and were added to the SEC Custody Rule FAQs, specifically:
Receipt of securities from a client (FAQ II.1): Advisers may receive securities from a client and have three days from receipt to return them to avoid having “custody” under the Rule. The Division would not consider the adviser to have received client assets until firm personnel are able to access the mail or deliveries, which may not be as prompt in response to the firm’s business continuity plan related to Covid-19.
Filing of Form ADV-E upon completion of the surprise custody examination (FAQ IV.7): The Division would not recommend enforcement action against the adviser for failing to complete the surprise examination and submit Form ADV-E by the 120-day deadline due to the logistical disruptions due to Covid-19, as long as the independent public accountant files such a report as soon as practicable, but no later than 45 days after the original due date.
Requirement to maintain securities at a qualified custodian for certain privately offered securities (FAQ VII.4): For the duration of Covid-19 related closures and until such time as physical certificates can reasonably be placed with a qualified custodian, the Division would not recommend enforcement action if an adviser does not maintain such certificates with a qualified custodian, provided the adviser meets five requirements as outlined in the FAQ.
Pooled investment vehicle subject to an annual audit and distribution of the pool’s audited financial statements within 120 days of year-end (FAQ VI.9): Although there has yet to be recent relief regarding the 120-day rule (180-day rule for fund of funds), guidance within this FAQ from March 2010 indicates that the Division would not recommend enforcement action against an adviser relying on this exemption provision and reasonably believed that the pool’s audited financial statements would be distributed within the 120-day deadline, but failed to have them distributed in time under certain unforeseeable circumstances.
This of course is helpful to those advisers who have custody and know they have custody as defined in the Rule (paragraph (d)(2)) by holding, directly or indirectly, client funds or securities, or has any authority to obtain possession of them. Many advisers continue to operate unknowingly that they have “custody” and are required to have an annual surprise custody examination conducted (or use the audit exemption). Enforcement actions continue to be issued to advisers that have not had a surprise examination performed when required, examinations were not performed in accordance with the rules set forth, or for violating the independence requirement with their auditor.