Custody rule

Example

A registered adviser's calendar-year fund has custody by definition: the GP controls the fund's bank account and can move money. Rather than a surprise examination and quarterly custodian statements to each LP, the adviser elects the audit route. Fieldwork runs February to March, the auditor signs on 10 April and the administrator posts the audited statements to the LP portal on 20 April, ten days inside the 120-day deadline of 30 April. A fund of funds in the same group, whose underlying funds deliver their own audits in late April, has until 29 June, the 180th day.

Confused with

Fund audit. The audit is the mechanism; the custody rule is one reason for it. Most LPAs require an audit anyway, including for exempt reporting advisers, to whom the rule does not apply.

Qualified custodian. The bank or broker that holds cash and securities. The adviser has custody whether or not it touches the assets, because as general partner it has authority over them. Privately offered securities such as portfolio company shares can be held in the fund's own name under an exception, provided the fund is audited.

In practice

The deadline is the operational fact. A late audit is a rule breach for a registered adviser, and the common causes are late portfolio company valuations, an underlying fund that reports late, and a first-year audit nobody scheduled. The rule also requires the auditor to be registered with and inspected by the PCAOB, which rules out some small accounting firms.