The Custody Rule can be difficult for private equity and real estate fund managers to navigate. When I see some regulatory relief or clarification I hope for the best. 16th Amendment Advisors received relief for one of its funds based its particular circumstance Could that relief may be useful for other fund managers?
That’s not likely to be true. The fund’s sole investor are the firm’s principals. The Securities and Exchange Commission agreed in a new “no-action” letter that the firm does not have to comply with independent verification and account statement delivery provisions of clauses (a)(2), (a)(3) and (a)(4) of the Custody Rule in connection with that fund.
While the adviser does have custody of the assets in that fund, requiring a surprise exam or an annual independent audit would seem to be an unnecessary expense given that the people who control the adviser are the only investors in the fund.
The conditions the SEC recognized in giving the relief were:
- All investors have easy access to information (either statutory, contractual or some combination of the two) concerning the management of adviser, the Funds and each of the Fund’s general partners;
- All investors are listed as “control persons” in Schedule A to Form ADV because of their status as 16th Amendment’s officers or directors with executive responsibility (or having a similar status or function;
- All investors have a material ownership in the fund; and
- Investors, their spouses, children, and investment vehicles established for the individual or joint benefit of them are the only investors in the fund.
This relief is useful for feeder funds for ownership by the principals in the fund. It may be too narrow for a broader employee ownership vehicle.
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