The California Department of Corporations (“DOC”) recently proposed amendments to the California investment adviser custody rule, Section 260.237 of Title 10 of the California Code of Regulations. The October 18, 2012 announcement follows an initial invitation for comments on the proposed changes issued by the DOC on July 8, 2011. The proposed changes are in response to, and incorporates provisions from, the recently adopted amendments to the Securities and Exchange Commission’s (“SEC”) Custody Rule, and the North American Securities Administrators Association’s (“NASAA”) Model Custody Rule. The proposed amendments to the California rule strike the existing language in favor of the NASAA model rule, subject to certain California-specific provisions. Like the existing rule, the proposal requires that advisers with custody maintain those assets with a qualified custodian, subject to certain limited exceptions. Of note, the proposed changes provide a specific definition of “custody”; require advisers with custody to undergo an annual surprise examination by an independent public accountant; and specify that certain audits and independent verifications must be performed by Certified Public Accountants that are registered with, and subject to regular inspection, by the Public Company Accounting Oversight Board. Unlike the model rule, the California proposal relaxes account statement requirements for advisers to private funds in an effort to maintain the confidentiality of any proprietary trading models developed by the adviser. According to the DOC, the “proposed regulatory action seeks to increase uniformity with investment adviser regulation in other states” and the SEC. The former NASAA model rule (which California’s existing custody rule is modeled after) was drafted based on the previous custody rule employed by the SEC. Changes to the federal rule in 2009 prompted changes to the Model Rule by NASAA, leading to the present DOC proposal. Thus, the idea is that regardless of whether an investment adviser registers with the state, or the SEC, there will exist the same responsibilities for advisers, and investors will have the same protections. The DOC is accepting comments on the proposed amendments until December 31, 2012. For further information on this or any other securities law related concern, please contact us or (619) 298-2880.
Jacko Law Group, PC
California Department of Corporations Announces Proposed Changes to Investment Adviser Custody Rule
Blog Filings & Registrations
November 20, 2012