In June 2014, the staff of the Securities and Exchange Commission’s (SEC’s) Division of Investment Management provided guidance (the Guidance Update) on how private fund managers using special purpose vehicles (SPVs) and escrow accounts may comply with Advisers Act Rule 206(4)-2 (the Custody Rule)  with respect to such vehicles and accounts.
Under the Custody Rule, registered investment advisers have custody of the assets of each private fund for which they or their affiliates serve as general partner or managing member or where they otherwise act in a “control” capacity. Such registered investment advisers (or private fund managers) generally comply with the Custody Rule by delivering audited financial statements for the fund to each beneficial owner within 120 days of the end of each fund’s fiscal year.
The Guidance Update clarifies how the audit provision of the Custody Rule applies to private fund managers whose funds utilize SPVs and/or escrow accounts. Depending on the circumstances, the private fund manager may be required to obtain a separate audit for SPVs and/or escrow accounts utilized by a private fund.