Custody Deadline Looming for Advisers to Funds
To avoid becoming subject to additional requirements under SEC Rule 206(4)-2 of the Investment Advisers Act of 1940 (the "Custody Rule"), most advisers to hedge funds must deliver audited financial statements by April 30, 2010. Advisers whose clients include private investment funds must ensure that audited financial statements are delivered to all investors within 120 days of the fund's fiscal year end. An adviser to a "fund of funds" may distribute the audited financials to investors within 180 days from the end of the fund of funds' fiscal year end. The SEC defines a "fund of funds" as a pooled investment vehicle that invests 10 percent or more of its total assets in other pooled investment vehicles that are not, and are not advised by, a related person of the pool, its general partner, or its adviser. In general, the audited financial statements must be prepared in accordance with GAAP. Advisers that do not distribute the audited financial statements by the required deadline will be deemed to have custody of investor assets under the Custody Rule and be subject to additional requirements, including, but not limited to, engaging an independent public accountant to perform a surprise audit before December 31, 2010.