Tag: Custody Rule

So Many Wrongs…

I tripped across an enforcement case that was so full of wrong things that I had to re-read it. In one sense, I saw a clever way to exploit an investment feature. On the other hand, the whole investment felt morally wrong, was deceptive and violated at least one important rule under the Investment Advisers Act.

grim reaper

Given my station in life, I had not come across bonds with a “survivor option.” It’s a feature that allows an investor’s heirs to redeem the bonds at par value upon the investor’s death. It’s an attractive investment feature for older investors who are concerned that rising interest rates will hurt the value of their bond holdings. The survivor option allows a bond to be redeemed at face value. If the bond has decreased in value because of higher interest rates, the investor’s principal is protected at death.

If you are clever, terminally ill, and want to leave cash to your heir, there is a way to exploit this feature.

Step one: find some bonds with a survivor option that are trading at a discount.
Step two: buy those bonds.
Step three: die quickly.
Step four: have your heir redeem the bonds at face value, turning the purchase discount into a gain.

If you are morally challenged and have a terminally ill family member, perhaps you could convince them to make this investment for your benefit.

If you are morally challenged and want to make some money, you could seek out terminally people, befriend them, open a joint account and invest together in the bonds.

If you are Donald Lethen, as least according to the Securities and Exchange Commission, you could raise capital to do this and break a bunch of security laws in the process.

According to the SEC Order, Mr Lethen created an investment fund managed by his Eden Arc Capital Management firm to invest in these bonds with survivor options.  He  used contacts as nursing homes and hospices to find patients with less than six months to live. He gave them a fee and then opened joint accounts with the patients to invest in the bonds with survivor options that were trading at a discount.

The SEC alleges that Mr. Lethen was merely a nominee for the investment fund that had funded the purchase of the bond. The fund could not be joint account owner and receive the survivor benefits. Mr. Lethen himself was the joint owner of the account funded with the investment fund’s money to buy the bonds.

Let me know if you see the Investment Advisers Act rule violation.

Let’s look at the other issues while you think about it.

Mr. Lethen does not seem to be misleading the patients. They get paid for their involvement in the scheme.

He may be misleading the bond issuers. That would depend on the wording of the survivor option. Mr. Lethen was the named joint account holder. It’s not clear if he was making untrue statements to exercise the survivor option.

Back to the Advisers Act issue. Do you see the problem?

The Custody Rule.

Mr. Lethen is putting the fund money into a joint account controlled by Mr. Lethen. The account was not in the fund’s name or controlled by the fund’s general partner/investment manager. Mr. Lathen failed to custody the fund assets in accounts in the fund’s name or in an account that contained only fund assets controlled by the fund manager.

Sources:

The Grim Reaper On a cottage in Netton Street. Copyright Maigheach-gheal and licensed for reuse under this Creative Commons Licence

 

Custody Failure Pinned On the Gatekeepers

I remember the SFX case because the CCO was charged for compliance failures. Now the auditors of SFX have been been charged for their failures.

13814386115_87ab79eb34_z

SFX Financial Advisory Management Enterprises is wholly-owned by Live Nation Entertainment and specializes in providing advisory and financial management services to current and former professional athletes. The SEC charged SFX’s former president Brian J. Ourand with misusing his control over client accounts to steal approximately $670,000 over a five-years. The SEC charged the CCO for failing to supervise Ourand, violating the custody rule and making false Form ADV filings.

Continuing to pursue the failure, the SEC went after the SFX auditors. The SEC’s order finds that Santos, Postal & Co. P.C. and Joseph A. Scolaro conducted deficient surprise custody examinations of SFX Financial Advisory Management Enterprises.

In one instance the SEC charged the audit firm for stating that it complied with certain procedures to verify client assets when it did do the verification. In another instance the audit firm stated that client assets were held with a qualified custodian when in fact they were not.

The SEC imposed the custody rule and the surprise exam for adviser-controlled accounts specifically to prevent the kind of fraud that occurred at SFX.

Sources:

Going All In To Save The Fund

In browsing through enforcement actions I look for lessons learned. In some cases it’s compliance doing its job and stopping a fraud before it gets too big. The case against Owen Li caught my eye. His trades were not working so he made a last ditch effort to make it all back. Given that this about an enforcement action, you can guess how that trade worked out.

poker face

Mr. Li was an alumnus of Galleon Capital. After that firm imploded, he went to work for another firm and then left in 2012 to start his own firm: Canarise Capital. He managed to raise $50 million of capital.

As part of the fundraising, the documents stated that risks would be managed through limits on position sizing and market exposure. Generally, no position would exceed 10% of the fund’s assets.

The first trouble came in February of 2014 when Mr. Li must have fallen in love with Facebook and Groupon. Those each accounted for 20% of the fund’s capital. He was operating outside of his investment mandate.

Then Mr. Li started playing games with orders at his prime broker to keep his margin balance high. When the prime broker got wind of the bad behavior it cancelled the margin allowance and placed trading restrictions.

The Custody Rule worked to an extent in this case. The NAV that the fund sent out differed materially from the NAV sent by the fund administrator directly to investors. He blamed the error on the fund administrator. That seemed to work twice.

Mr Li must have sensed that it would not work a third time. He put off approving the NAV distribution for November 2014. The NAV he told investors and the NAV that would be sent out by administrator would differ materially. He delayed and then decided to go all in.

He liquidated fund cash and other positions to buy long positions in market index options with short-dated expirations. He had eliminated all short positions in the account. He basically took all of the fund’s assets and pushed them all in to one position. Hardly a sound way to manage to risk. Certainly, it was outside the investment promises he made to his investors.

If it worked well, there was a huge upside. I assume thought his investors would forgive his past sins.

But rarely do enforcement actions come from a happy result. Mr. Li had bet wrong. When the options expired he incurred $39 million in losses, leaving the fund with less than $200 thousand in assets. Over the course of the year he had caused the fund to lose $56.5 million.

In years past, a manager might have been able to keep the lie going. Look at Madoff. I suspect something similar, although less catastrophic happened to Madoff. With no third-party reporting on the investments, he could keep going.

Without the Custody Rule, maybe Mr. Li could have put up a big Madoff lie and tried to go all in again in the future. But since investors were getting statements directly there was no place for him to hide. The Custody Rule worked.

Sort of worked. It prevented a Ponzi scheme from forming. It did not prevent the investors from being wiped out.

As for the enforcement, the SEC charged Mr. Li with failing to adhere to his investment limitations and labeled that a fraudulent action under Section 206.


Sources:

Poker Face by Lawrence
CC BY NC SA

Custody Rule Enforcement

SEC Seal 2

The Securities and Exchange Commission has been pointing out custody issues for investment advisers, made it an exam priority for 2014, highlighted in its presence exam initiative, and highlighted it in its never before examined initiative. So it should come as no surprise that the SEC brought an enforcement case solely for custody rule violations.

The SEC brought charges against Sands Brothers Asset Management LLC, its co-founders Steven Sands and Martin Sands and its chief compliance officer and chief operating officer Christopher Kelly. They are contesting the charges, and we don’t have they’re side of the story.

I think you should pay attention to what the SEC highlighted in the press release as the violations:

According to the SEC’s order instituting an administrative proceeding, Sands Brothers was at least 40 days late in distributing audited financial statements to investors in 10 private funds for fiscal year 2010.  The next year, audited financial statements for those same funds were delivered anywhere from six months to eight months late.  The same materials for fiscal year 2012 were distributed to investors approximately three months late.

The SEC is pointing out very technical violations. Since it’s a 206 violation, the SEC does not have to allege intent to defraud or investor harm. Technical violations are enough.

Behind the scenes, the SEC is alleging more bad actions. According to the SEC’s order, Sands Brothers and the two co-founders were previously sanctioned by the SEC in 2010 for custody rule violations. One of the top things to do when getting a bad mark from the SEC is to fix the problem. The Sands knew there was a problem and apparently continued to violate the custody rule.

Private fund managers can comply with some aspects of the custody rule by distributing audited financial statements to fund investors within 120 days of the end of the fiscal year. That is generally an easy standard because most private funds are required to deliver audited financial statements to investors each year within that time frame. As much as a fund manager does not want to violate an SEC rule, a fund manager does not want to intentionally violate its explicit obligations under its partnership agreement.

The tougher part of the custody rule for fund managers is older, legacy funds and parallel funds that are not required to be audited and the investors do not want to pay for an audit.

Sources:

Updated Guidance on the Custody Rule for Private Funds

Barnum and Bailey Limited Stock Certificate

The Securities and Exchange Commission has provided some updated guidance on the Custody Rule for private funds. It has sometimes been tricky for private funds to comply with Rule 206(4)-2.

The custody rule deems it to be a fraudulent, deceptive or manipulative act, practice or course of business for an adviser to have custody of client funds or securities unless a qualified custodian maintains those funds and securities in a separate account for each client under that client’s name. The custody rule provides an exception from the custodian requirement for a fund in the case of certain privately offered securities it holds, provided the fund’s financial statements are audited.

“Privately offered securities” are defined as securities that are: (A) acquired from the issuer in a transaction or chain of transactions not involving a public offering; (B) uncertificated, and ownership thereof is recorded only on the books of the issuer or its transfer agent in the name of the client; and (C) transferable only with the prior consent of the issuer or holders of the outstanding securities of the issuer.

This has posed a challenge for real estate fund managers and private equity fund managers that happen to have an entity that is certificated. For example, if the real estate fund has a REIT subsidiary, it may have issued stock certificates as a matter of practice. The Custody Rule would mandate that the fund hire a qualified custodian to hold that single REIT stock certificate. That custody relationship is expensive and provides little (no?) protection to fund investors.

The Investment Management Division issued an update that provides a great deal of relief.

The Division created a new category of securities for purposes of the custody rule: “private stock certificates.” These are non-transferable stock certificates or “certificated” LLC interests that were obtained in a private placement. These fail to meet the definition of “privately offered securities” because they are certificated.

“The Division would not object if an adviser does not maintain private stock certificates
with a qualified custodian, provided that:
  1.  the client is a pooled investment vehicle that is subject to a financial statement audit in accordance with paragraph (b)(4) of the custody rule;
  2. the private stock certificate can only be used to effect a transfer or to otherwise facilitate a change in beneficial ownership of the security with the prior consent of the issuer or holders of the outstanding securities of the issuer;
  3. ownership of the security is recorded on the books of the issuer or its transfer agent in the name of the client;
  4. the private stock certificate contains a legend restricting transfer; and
  5. the private stock certificate is appropriately safeguarded by the adviser and can be replaced upon loss or destruction.”

That is fantastic news.

Even better, the update adds some clarity to partnership agreements:

Partnership agreements, subscription agreements and LLC agreements are not certificates under Rule 206(4)-2(b)(2)(B) and the securities represented by such documents are privately offered securities provided they meet the other elements of Rule 206(4)-2(b)(2).

I know a few fund advisers that took a very conservative position on the Custody Rule and were shipping partnership agreements their custodians. It looks like that is not required by the Custody Rule.

References:

The SEC Is Not Happy with Custody Compliance

sec-seal

The Securities and Exchange Commission issued a Risk Alert on compliance with its custody rule for investment advisers. Beyond the warning to investment advisers, it also issued an Investor Bulletin to protect advisory clients from theft or misuse of their funds and securities.

After a review of recent examination, the SEC’s Office of Compliance Inspections and Examinations found significant deficiencies in custody-related issues in about one-third of the firms examined that had serious deficiencies.

  • Failure to recognize that they have custody, such as situations where the adviser serves as trustee, is authorized to write or sign checks for clients, or is authorized to make withdrawals from a client’s account as part of bill-paying services
  • Failure to meet the custody rule’s surprise examination requirements
  • Failure to satisfy the custody rule’s qualified custodian requirements, for instance, by commingling client, proprietary, and employee assets in a single account, or by lacking a reasonable basis to believe that a qualified custodian is sending quarterly account statements to the client.
  • For fund managers, failures to (1) meet requirements to engage an independent accountant and (2) demonstrate that financial statements were distributed to all fund investors.

In the Risk Alert, the SEC is shares some of the custody deficiencies observed in order to assist investment advisers in complying with the custody rule.

2013 SEC Examination Priorities

SEC National Exam Program

The Securities Exchange Commission published its examination priorities for 2013. They cover a wide range of issues at financial institutions, including broker-dealers, clearing agencies, exchanges and self-regulatory organizations, investment companies, hedge funds and private equity funds, and transfer agents.

The scope of an IA examination is “generally limited to the issues and business practices of the registrant that are perceived by the staff to present the highest risks to investors and the integrity of the market. Thus, the scope of exams will vary from registrant to registrant.”

But of course there are issues that will be at the top of the list. In addition to the specific risk areas unique to each registrant, the staff will consider the following focus areas when scoping and conducting examinations in 2013 that I saw as relevant to private funds..

1. Safety of Assets.

The staff will review the measures taken by registrants to protect client assets from loss or theft, the adequacy of audits of private funds, and the effectiveness of policies and procedures in this area. Exams will focus on issues such as whether advisers are:

  • appropriately recognizing situations in which they have custody as defined in the Custody Rule;
  • complying with the Custody Rule’s “surprise exam” requirement;
  • satisfying the Custody Rule’s “qualified custodian” provision; and
  • following the terms of the exception to the independent verification requirements for pooled investment vehicles.

2. Conflicts of Interest Related to Compensation Arrangements.

The exam will look for undisclosed compensation arrangements and the conflicts of interest that they present. These activities may include undisclosed fees or solicitation arrangements, and referral arrangements. For example, some advisers that place client assets with particular funds or fund platforms are, in return, paid “client servicing fees” by such funds and fund platforms. Such arrangements present a material conflict of interest that must be fully and clearly disclosed to clients.

3. Marketing/Performance.

Marketing and performance advertising is an inherently high-risk area due to the highly competitive nature of the investment management industry. Aberrational performance of certain registrants and funds can be an indicator of fraudulent or weak valuation practices. The exam will also focus on the accuracy of advertised performance, including hypothetical and back-tested performance, the assumptions or methodology utilized, and related disclosures. Of course, the exam will test compliance with record keeping requirements by asking for the backup data.

In a surprise reference to the JOBS Act, the exam will review changes in advertising practices related to the JOBS Act, where feasible.

4. Conflicts of Interest Related to Allocation of Investment Opportunities.

Advisers managing accounts that do not pay performance fees side-by-side with accounts that pay performance-based fees face unique conflicts of interest. While reviewing portfolio management practices, the staff will confirm that the registrant has controls in place to monitor the side-by-side management of its different accounts. The exam will not want to see more profitable trades being allocated to the accounts that pay the most in fees.

5. Fund Governance.

Fund governance and assessing the “tone at the top” is a key component in assessing risk during any investment company examination.

6. New Registrants and Presence Exams.

Approximately 2,000 investment advisers have registered with the SEC for the first time as a result of Dodd-Frank. The vast majority of these new registrants are advisers to hedge funds and private equity funds that have never been registered, regulated, or examined by the SEC. The presence exam initiative is expected to run for approximately two years and consists of four phases: (i) engage with the new registrants; (ii) examine a substantial percentage of the new registrants; (iii) analyze our examination findings; and (iv) report to the industry on our observations.

7. Compliance with the Pay to Play Rule.

To prevent advisers from obtaining business from government entities in return for political “contributions”, the SEC implemented the Pay to Play rule. The staff will review for compliance in this area, as well as assess the practical application of the rule. Given that state and local elections are on tap for the next two years, the pay-to-play rule will be even more difficult for fund companies.

 

Custody and Private Funds

Last year, the Securities and Exchange Commission put a new rule in place restricting an investment adviser’s ability to have custody of its clients’ assets. Given that many private fund managers are going to have to register as investment advisers they need to figure out how to comply with this rule.

The rule is the anti-Madoff rule. The SEC wants client assets separate from the manager’s control and for the manager to safeguards in place to prevent a manager from sending out false statements to investors. This includes having a third party custodian and having the custodian send statements directly to investors and subjecting the accounts to a surprise inspection by an auditor.

Safekeeping required

Rule 206(4)-2(a) If you are an investment adviser registered or required to be registered under section 203 of the Act, it is a fraudulent, deceptive, or manipulative act, practice or course of business within the meaning of section 206(4) of the Act for you to have custody of client funds or securities unless:

(1) A qualified custodian maintains those funds and securities:

(i) In a separate account for each client under that client’s name; or

(ii) In accounts that contain only your clients’ funds and securities, under your name as agent or trustee for the clients.

If your fund has securities, then you need a “qualified custodian” holding those securities. There is an exception for “privately offered securities” that will make life much easier for private equity funds and real estate funds.

Use of a Qualified Custodian

So who can you use as a “qualified custodian“?

(d)(6) Qualified custodian means:

(i) A bank as defined in section 202(a)(2) of the Advisers Act or a savings association as defined in section 3(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(1)) that has deposits insured by the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act (12 U.S.C. 1811);

(ii) A broker-dealer registered under section 15(b)(1) of the Securities Exchange Act of 1934, holding the client assets in customer accounts;

(iii) A futures commission merchant registered under section 4f(a) of the Commodity Exchange Act (7 U.S.C. 6f(a)), holding the client assets in customer accounts, but only with respect to clients’ funds and security futures, or other securities incidental to transactions in contracts for the purchase or sale of a commodity for future delivery and options thereon; and

(iv) A foreign financial institution that customarily holds financial assets for its customers, provided that the foreign financial institution keeps the advisory clients’ assets in customer accounts segregated from its proprietary assets.

Surprise audits and custodian statements

In addition to the requirement in (a)(1) that a qualified custodian hold the securities, there are addition requirements in (a)(2), (a)(3) and (a)(4) that you notify the client about the custodian, require separate statements be sent to the client and that the account be subject to surprise audits.

When investment funds are the clients these requirements make less sense, so (a)(5) requires funds to send the account statements to their limited partners.

There is an exception for pooled investment vehicles:

(b)(4) Limited Partnerships subject to annual audit. You are not required to comply with paragraphs (a)(2) and (a)(3) of this section and you shall be deemed to have complied with paragraph (a)(4) of this section with respect to the account of a limited partnership (or limited liability company, or another type of pooled investment vehicle) that is subject to audit (as defined in rule 1-02(d) of Regulation S-X (17 CFR 210.1-02(d))):

(i) At least annually and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) within 120 days of the end of its fiscal year;

(ii) By an independent public accountant that is registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by, the Public Company Accounting Oversight Board in accordance with its rules; and

(iii) Upon liquidation and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) promptly after the completion of such audit.

If your auditor is not subject to inspection by PCAOB, you would have to switch auditing firms for your private fund to use this exception. You need to make sure your auditing firm has the horsepower to get the audited down in time for you to get financial statements out in within 120 days of fiscal year end.

Certain privately offered securities

There is a exception for having to deliver “privately offered securities” to the qualified custodian. Certain privately offered securities are:

(A) Acquired from the issuer in a transaction or chain of transactions not involving any public offering;

(B) Uncertificated, and ownership thereof is recorded only on the books of the issuer or its transfer agent in the name of the client; and

(C) Transferable only with prior consent of the issuer or holders of the outstanding securities of the issuer.

Notes and Interests in Subsidiaries and Portfolio Companies

For real estate private equity, the problem will be notes. They may be considered securities. Notes won’t meet the definition of uncertificated and they are most likely transferable.

For entities and portfolio companies, the key will be to make sure the subsidiaries under the funds are not certificated and there is requirement for consent in order to transfer. I think fund managers are going to have to back and inventory their subsidiary entity documents.

Of course you may be able to make an argument that the interest in the subsidiary is not a security. If it’s wholly-owned you can make a strong argument that the ownership is not a security since you are not relying solely on the efforts of others. But if the subsidiary is corporation you may be stuck treating it as a security. It’s generally hard to argue that shares in a corporation are not a security.

In the SEC Q&A about the custody rule:

Question II.3

Q: If an adviser manages client assets that are not funds or securities, does the amended custody rule require the adviser to maintain these assets with a qualified custodian?

A: No. Rule 206(4)-2 applies only to clients’ funds and securities.

So you don’t need to deliver all of the fund assets to the custodian. Just those that are securities and cash. Presumably, fund managers are already keeping their funds’ cash in a bank account and not in a mattress. They just need to make sure that the cash accounts are in the fund names.

At first, I thought the limited partnership exception would allow private fund managers to completely avoid the burden of this rule. That was too broad. Now I think fund managers are stuck with hiring a qualified custodian if they register with the SEC. I would guess there will lots of private fund managers looking for custodians before they register.

Sources:

ARMOR * PLATE / ptufts / http://creativecommons.org/licenses/by-nc-sa/2.0/

More Information on the Custody Rule

With the removal of the 15 client rule exemption from registration with the SEC, many private funds are going to have to comply the custody rule Rule 206(4)-2. Private equity firms will have the most problems trying to meets the demands of the rule.

The SEC is trying to help. They updated the Staff Responses to Questions About the Custody Rule.

Apparently they have been getting lots of questions about how the surprise examination should work.

Question IV.4

Q: Is there an example of a report that may be issued by the independent public accountant performing a surprise examination of the adviser?

A: Yes. As stated within the Commission’s Guidance for Accountants (see Release No. IA 2969), the surprise examination is a compliance examination to be conducted in accordance with AICPA attestation standards. The AICPA has issued an illustrative surprise examination report to reflect the reporting specified in the Guidance for Accountants. The illustrative report is available on the AICPAs website at http://www.aicpa.org/InterestAreas/AccountingAndAuditing/Resources/
AudAttest/AudAttestGuidance/DownloadableDocuments/
FINAL_Surprise_Exam_Report_File_for_AICPA_org_REVISED_7.22.10.pdf.

Additionally, the AICPA published this illustrative surprise examination report in the May 2010 edition of the Audit and Accounting Guide — Investment Companies. (Posted September 9, 2010)

Question XIII.3

Q: Within the Guidance for Accountants contained in Release IA-2969, the Commission indicated that two types of reports issued under the AICPA professional standards (Type II SAS 70 or AT 601 compliance attestation) would be sufficient to satisfy the requirements of the internal control report. Are there other report formats that can be used to satisfy the Custody Rule?

A: Yes. The AICPA recently developed a report that under AT 101, Attest Engagements, of the AICPA’s professional standards that would be acceptable under the Custody Rule. An illustrative report is currently available on the AICPA’s website at http://www.aicpa.org/
InterestAreas/AccountingAndAuditing/Community/InvestmentCompanies/
DownloadableDocuments/Custody_report_September_1final.pdf. (Posted September 9, 2010)

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Private Equity and the Custody Rule

With the impending removal of the 15 Client Rule exemption from registration with the SEC, I was scratching my head trying to figure how to make the SEC’s new custody rule work for private equity.

The SEC recently updated its guidance on custody rule compliance truing to add clarity for advisers to pooled investment vehicles.

Here is one:

Question II.3

Q: If an adviser manages client assets that are not funds or securities, does the amended custody rule require the adviser to maintain these assets with a qualified custodian?

A: No. Rule 206(4)-2 applies only to clients’ funds and securities. (Posted 2003.)

Actually that does not help. A private equity fund will hold interests in private companies. Those interests may be stock, LLC interests or partnership interests.  Just because the company is private, those interests may still be securities.

For real estate private equity, the deeds to the underlying property would fall outside the custody rule. The intermediate entities, REITs and joint ventures may not fall outside the custody rule.

§ 275.206(4)-2(b)(2) has an exemption for certain privately offered securities, if the securities are:

(A) Acquired from the issuer in a transaction or chain of transactions not involving any public offering;
(B) Uncertificated, and ownership thereof is recorded only on the books of the issuer or its transfer agent in the name of the client;
and
(C) Transferable only with prior consent of the issuer or holders of the outstanding securities of the issuer.

This exemption is available only if the fund is audited, and the audited financial statements are distributed, as described in paragraph (b)(4) of this section.

The “uncertificated” requirement can be a problem. It is common practice for lenders relying on private company interests to require they be certificated to get better priority under the UCC.

The limits on transfer are a problem because as the holder of the interests, you want the flexibility to transfer interests.

The financial statements requirement is another extra burden, although may not be a problem for many funds. This requires:

  • annual audit
  • in accordance with GAAP
  • within 120 days of the end of the fiscal year
  • independent accountant registered and subject to inspection by PCAOB

(I’m not sure how quickly the SEC can change this rule if the Supreme Court rules PCAOB unconstitutional.)

In looking towards Capitol Hill, the Senate’s would exempt private equity firms from having to comply with the custody rule since they would not have to register. The House’s would not exempt private equity firms from registration and they would be subject to the custody rule.

One interesting aspect of the bills is that fund advisers that are currently registered because they have more than 15 clients/funds may no longer have to be registered if they fall under the venture capital fund advisers exemption or private equity fund advisers exemption. (Assuming those exemptions survive in the final bill.)

Sources:

Image of Old West Bank – It’s a beautiful bank is by oddsock