Client Alert

SEC Responds to Advisers’ Questions under Business Continuity Scenarios

19 Mar 2020

Like all of us, the SEC and its staff are moving rapidly to address changes to normal procedures required in the face of COVID-19. In response to questions recently raised by the Investment Advisers Association (IAA) on behalf of its members, the SEC staff clarified its expectations with respect to certain aspects of the Custody Rule (Rule 206(4)-2 under the Investment Advisers Act of 1940) and Form ADV disclosure.  

The IAA advised the staff that investment advisers may not receive audited financial statements from accounting firms in time to deliver audited financial statements to limited partners in private funds within 120 days of the end of a private fund’s fiscal year, as required under the audit exception to the Custody Rule. The SEC staff directed the IAA to the “unforeseeable circumstances” language in the Question VI.9 of the existing Custody Rule FAQs:

Question VI.9

Q: If a pooled investment vehicle is subject to an annual audit and its adviser is relying on the “audit provision” under rule 206(4)-2(b)(4), would the adviser be in violation of the rule if the pooled vehicle fails to distribute its audited financial statements within 120 days after the end of its fiscal year? 

A: The Division would not recommend enforcement action for a violation of rule 206(4)‑2 against an adviser that is relying on rule 206(4)-2(b)(4) and that reasonably believed that the pool’s audited financial statements would be distributed within the 120-day deadline, but failed to have them distributed in me under certain unforeseeable circumstances. (Modified March 5, 2010.)

The SEC staff also stated that if an adviser receives client checks, but the adviser’s personnel is unable to access mail or deliveries at an office location due to implementation of the firm’s business continuity plan in response to circumstances related to COVID-19, the staff would not consider the adviser to have received client assets at that office location until firm personnel are able to access the mail or deliveries at that office location. (See Custody Rule FAQs, Question II.1).

Finally, the SEC staff amended its ADV FAQs to confirm that an adviser does not have to amend its response to Item I.F of its Form ADV to reflect new locations from which employees are conducting investment advisory business as a result of temporary work from home scenarios under the adviser’s business continuity plan.



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