Kingdom Trust Company Recognizes the Compliance Questions Confronting Newly Registered Private Fund Investment Advisers

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There is no doubt that these are challenging times for Investment Advisers. The Dodd-Frank Act or the Wall Street Reform and Consumer Protection Act and the regulations promulgated under it along with the ones still to come (and they’re sure to come) have guaranteed that. The Kingdom Trust Company believes that the challenges promise to continue for many years.

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In its Release Number IA-3222 dated June 22, 2011, the SEC, extended the registration deadline for private fund advisors to March 30, 2012. That date is now upon us. For those newly affected by registration they have some additional challenges. Along with the registration comes compliance with other rules as well. One of those rules is the Custody Rule (Rule 206(4)-2 under the Investment Advisers Act of 1940). As they prepare to complete the registration process, private fund advisors will also have to review their current custody arrangements to insure that their client assets are held with a qualified custodian or that they fall under an exception. They will have to make sure that their custodian is complying with the rules for delivery of statements and, if they, too, are sending statements, that their own statements contain the appropriate legends. They have to be prepared to make the necessary disclosures to their clients in the event that they have to move the assets to a qualified custodian. They may have to determine whether they are subject to the surprise examinations by an accountant registered with the PCAOB. If their custodian is a related party, they will also have to be prepared to obtain an internal control report from the custodian and the custodian will have to be prepared to provide the report which has been described as the equivalent of a Type II, SAS 70 report. They may also have to report on their custodial arrangements on their Form ADV.

In a conversation with Kingdom’s General Counsel, Tim Kuhman, he observed that some private fund advisors have taken steps to avoid some of the considerations mentioned above. Some have taken an “audit approach” to eliminate the need for the surprise exam. Under that approach a private fund that has a PCAOB-registered accountant prepare an audited financial statement and provides the statement to its underlying investors within 120 days of the end of the funds fiscal year, does not need to have a surprise exam. However, a number of advisers who have chosen that approach are discovering that the 120 days runs out fairly quickly and have had issues meeting the deadline. Mr. Kuhman indicated that “as the deadline approaches we’ve seen some scrambling to find an independent qualified custodian to accept the assets.”

Mr. Kuhman also observed that still others have placed their assets with an independent qualified custodian to eliminate the need for the internal control report. For those paying close attention to the SEC’s release at the time of the Custody Rule amendments, they will note that while the SEC did not specifically mandate the use of an independent qualified custodian, it was explicitly encouraged. The tone of the release seems to indicate that they believe such use would increase transparency, accountability and investor protection. It creates a system of checks and balances whereby and independent PCAOB-registered accountant compares the records of the adviser with the holdings of the custodian and the statements to the investors to insure that the investments claimed to have been made have been made and the assets exist with the custodian and are accurately disclosed to the investors.

He summed up the conversation stating “these are challenging times for the advisers but the system was designed to give some relief from some of the compliance issues with the choices available to the adviser. Choosing to use an independent qualified custodian as opposed to a related party can eliminate the need for the costly and time-consuming internal control report and add a layer of transparency to further protect the adviser’s investors.”

The Kingdom Trust Company is one such independent qualified custodian. With offices in Chicago, IL, Sioux Falls, SD, and Murray, KY, The Kingdom Trust Company is well situated to assist the private fund advisers. Kingdom understands the new rules and will work with the advisers and their consultants to develop and provide a custody solution that meets the needs and business model of the adviser. The Kingdom Trust Company’s has focused its efforts on serving the custody needs of the private fund industry.

For more information, contact The Kingdom Trust Company at (888) 753-6972 or visit


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Doug Lawson
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